A rally in Asian shares fizzled out on Thursday as markets marked time before the European Central Bank’s policy decision later in the day, with the euro staying pressured by widespread expectations of a rate cut to support fragile euro zone growth.
Safe-haven U.S. dollar outperformed with its index measured against key currencies gaining 0.5 percent. “Until markets see how the ECB intends to respond to the debt problem through means other than interest rate cuts, it would be difficult to take positions on the euro,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.5 percent after hitting a seven-week high on Wednesday. U.S. markets were closed on Wednesday for the Independence Day holiday. Japan’s Nikkei average eased 0.1 percent, after closing at a two-month high on Wednesday.
A Reuters poll of economists showed a majority expect the ECB to cut its main interest rate by 25 basis points to 0.75 percent on Thursday, while money market traders are evenly split on whether the central bank will cut the deposit rate, a separate survey showed. There is also speculation the ECB could restart its purchases of troubled euro zone bonds under its securities markets programme (SMP) to push down euro zone borrowing costs or take another round of long-term refinancing operation (LTRO) to inject additional funds into the financial system. “The focus for today’s ECB meeting is whether it will take steps other than cutting interest rates, namely restarting SMP or LTRO,” added Brown Brothers Harriman’s Murata.
The euro steadied around $1.2525, stuck in a recent $1.24-$1.27 range against the U.S. dollar. Against riskier currencies, the euro held near record lows, standing at A$1.2214 against the Aussie, close to its all-time trough of A$1.2124 hit in early February, and at NZ$1.5609 against the kiwi, just above its lifetime low of NZ$1.5541 hit on Wednesday. “We suggest that selling the EUR and buying a relatively ‘high beta’ currency, such as the AUD, would perform well in light of a more aggressive ECB response to the problems” in Europe, Barclays Capital analysts said in research note.
Also on Thursday, the Bank of England is expected to launch a third round of monetary stimulus at its policy meeting. Surveys on Wednesday suggested all of Europe’s biggest economies were in recession or heading there and there was little sign things will improve soon, backing views for easing by Europe’s major central banks this week
