The euro eased against the dollar today but still held near a four-month high, after weak US jobs data fanned speculation that the Federal Reserve would launch more monetary stimulus this week.
The heightened expectations for the Fed to announce another round of bond purchases, known as QE3, at a two-day policy meeting that ends on Thursday were likely to support the euro over the next few days, traders and analysts said.
The euro dipped 0.3 per cent to $1.2786, with traders citing profit-taking in the wake of its rally on Friday, when the euro climbed to $1.2818 on trading platform EBS, its strongest level in nearly four months.
"The weak payrolls report has put QE3 firmly on the agenda for this week," said Annette Beacher, head of Asia-Pacific Research at TD Securities.
Traders said the fact that the euro has climbed above its June high around $1.2750 was technically bullish for the euro.
The euro may add to its gains and start rising towards $1.30 if the Fed announces QE3 this week and Germany's constitutional court backs the euro zone's permanent bailout fund in a ruling due on Wednesday, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
That will not mean clear sailing ahead for the single currency, however, with investors likely to continue to focus on developments in Greece and Spain, Mr Okagawa said.
"We may see a false dawn, so to speak, and a rise to around $1.30," he said. "But if you ask whether that will lead to a full-blown change in trend, I think that might be difficult.”
Position squaring ahead of the Fed's policy decision could weigh on the euro in the near term, and a drop below $1.2750 could cause selling pressure to strengthen. But the single currency is likely to find support at levels around $1.2600 to $1.2650, said a trader for a Japanese brokerage in Tokyo. "The preferred operation will probably be to buy on dips rather than to sell," the trader said about the euro.
The dollar index, which measures the dollar's value against a basket of currencies, stood at 80.288, stuck near a four-month low of 80.151 hit on Friday after data showed US jobs growth slowed sharply in August.
In a Reuters poll conducted after the jobs numbers, economists saw a 60 per cent chance of the Fed embarking on QE3 this week, compared with the 45 per cent chance seen in a late August poll.
More stimulus from the Fed would make it attractive for investors to use the US dollar as a funding currency to buy higher yielding assets in carry trades.
The expectations of Fed easing helped lend support to the Australian dollar, which retreated moderately after hitting a two-week high just above $1.0400 on Friday.
The Australian dollar dipped 0.3 per cent to $1.0358 , having come under a bit of pressure after data showed a surprising year-on-year drop in China's imports in August. The Aussie dollar tends to be sensitive to economic data from since China is Australia's single-biggest export market.
The US dollar eased 0.1 per cent versus the yen to 78.24 yen, hovering near a one-month low around 78.02 yen hit on Friday. Japanese authorities may start stepping up their rhetoric against the yen's rise versus the dollar, if the dollar were to drop below 77.90 yen, a low hit in early August, said SMBC's Okagawa, adding that such jawboning may help to curb the dollar's drop versus the yen.
Reuters