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Monday, September 5, 2011

FOREX-Euro extends losses, Aussie wary ahead of rate news

* Euro faces more downside pressure in busy week

* ECB meeting outcome on Thursday key for common currency

* Commodity currencies hit, Aussie eyes RBA statement

* Swissie extends gains, pressures euro

By Antoni Slodkowski and Ian Chua

TOKYO/SYDNEY, Sept 6 (Reuters) - The euro extended its falls into a sixth straight session and floundered at one-month lows against the dollar on Tuesday, while commodity currencies continued to drop as ongoing jitters over the global economy prompted investors to dump riskier assets.

The common currency crept closer to its 200-day moving average and was poised to extend its longest losing streak since April, hurt by soft equities and after Italian bonds were sold on worries Rome is not doing enough to bring its debt under control.

Underscoring investor angst over a watered down Italian austerity package, the cost of insuring Italian debt against default rose above that of Spain for the first time since Dec. 2009, while European stocks tumbled 4 percent on Monday

But analysts said that while the euro fell sharply last week, its moves were still relatively steady compared to other markets.

"The euro is obviously down on fundamentals, but looking at European stocks and bonds, its fall has been remarkably calm," said Osamu Takashima, chief FX analyst at Citibank.

"That's because long term investors are the biggest players here and they have been pulling out of some euro-denominated assets. Their holdings, however, are at times too large to just simply dump everything and their decision making processes take time," said Takashima.

Traders have also pointed out that the euro's fall has been limited by demand from Asian sovereign players looking to diversify their foreign reserves.

The euro last traded down 0.2 percent at $1.4075 , off a recent high of $1.4550 hit last Monday. Hedge buying related to option barriers at $1.4050 -- right below its one-month low of $1.4055 -- was seen giving it some support.

Below that level, traders said, orders mixed with both stop-loss selling and bids related to more barriers at $1.4000.

The heaviest pressure on the euro emerged from the safe-haven Swiss franc which inched back up towards a record high versus the dollar adding 0.3 percent to 0.7846 . The euro fell 0.5 percent to 1.1039 francs , off a recent peak of 1.1970 francs marked last Monday.

The pair found immediate support at the kijun line on their daily chart at 1.1027 francs, but traders expect more falls in the pair unless the Swiss National Bank starts intervening in currency markets again.


The euro's weakness saw the dollar index climb above 75.200, its highest since Aug. 8. Dollar/yen, though, continued in a tight range on either side of 76.80 yen , contained by the threat of yen-weakening intervention from Japan.

Traders said the key risk for the common currency this week is if the European Central Bank takes on a dovish stance at Thursday's policy meeting.

"Without the support of a more hawkish central bank, the euro will look very vulnerable," Societe Generale strategists Kit Juckes and Sebastien Galy wrote in a note, adding a fall below $1.3900 could easily take the common currency back to $1.3000.

The euro zone itself also faces a testing time, not least Greece's ongoing dispute with the EU and IMF on fiscal slippages which threatens to delay the next tranche of aid, worries about European bank funding and legal challenges to bailouts.

Last Friday, the closely watched U.S. non-farm payrolls report showed jobs growth grounded to a halt last month adding to fears about a U.S. recession and raising hopes the Federal Reserve will add more stimulus.

Markets though appeared to be starting to come around to the idea the Fed will do this by increasing the maturity of the assets in its balance sheets, known as 'operation twist', rather than launch a fresh round of bond buying, or QE3.

Right now this is not hurting the greenback too much, but some analysts suspect the Fed will have to go all in at some point.

"If and when QE3 does eventually happen (as our economists expect), we would expect a further rally in equities and the U.S. dollar resuming its downtrend," said the analysts at SG.

Commodity currencies struggled after coming under heavy pressure as most Asian bourses fell and S&P futures extended losses to 2.3 percent SPc1.

The Australian dollar last stood at $1.0508, down some 2-1/2 cents from last week's peak and 0.2 percent on the day.

The Reserve Bank of Australia meets to discuss monetary policy on Tuesday and is seen as certain to keep interest rates unchanged at 4.75 percent for a 10th straight month due to heightened global uncertainty.

"Downside risks to AUD remain over the next 24 hours given the global backdrop while on the domestic front, the RBA meeting provides scope for a less hawkish statement," said Besa Deda, chief economist at St George Bank. (Additional reporting by Hideyuki Sano; Editing by Joseph Radford)

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