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Euro holds ahead of EU, US policy moves
Wednesday, 1st August 2012 11.22am

The euro held steady against the dollar today before monetary policy decisions in the United States and the euro zone, with investors gearing up for possible European Central Bank action to stem the region's debt crisis.

But market players were mindful of the risk of disappointment when the ECB meets on Thursday. Bank President Mario Draghi last week boosted the euro and riskier assets by pledging to do everything necessary to preserve the euro.

Analysts said this would make many wary of taking a strong position and was likely to keep the euro trapped in a tight range against the dollar.

First, a U.S. Federal Reserve policy decision is due at 1815 GMT on Wednesday. Analysts expect the Fed will stop short of announcing aggressive measures to tackle a weak economy but nevertheless to signal it is ready to act.

The euro was flat at $1.2306, giving up earlier gains after German Bundesbank President Jens Weidmann said in an internal interview that government overestimated the ECB's capacities and placed too many demands on it.

However, the single currency held above Monday's low of $1.2225. It stayed below a peak hit late last week of $1.2390 on optimism following Draghi's comments.

"If the ECB come up with something very clear-cut we could see a position squeeze (higher) in the euro, depending on how much detail Draghi gives at the press conference," said Ankita Dudani, currency strategist at RBS.

She added that the risks of a positive outcome from the ECB or a disappointment were about 50/50, which was likely to keep trade in euro/dollar "quite muted". Investors were wary of German opposition to steps including a resumption of the ECB buying government bonds to depress yields. "The euro could benefit momentarily if the ECB says it will buy bonds. But that will probably provide a good opportunity to sell the euro," said Minori Uchida, chief FX strategist at the Bank of Tokyo-Mitsubishi UFJ in Tokyo. Many investors, analysts and traders also say the impact of any ECB's action would be temporary without a sustainable economic recovery in battered southern Europe. But euro zone data painted a gloomy picture for the region, with a business survey showing the region's manufacturing sector contracted for an 11th successive month. The dollar index was down 0.1 percent at 82.572, hovering above a near four-week low of 82.343 hit last week. (C ) Reuters

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