Euro Pares Gains Vs Dlr; Stg Down As QE Looms

Analysts seem to agree the dollar will be in favour in the near term, especially as a global economic slump continues.

The euro pared early gains on Wednesday, as concerns about the banking system and economy cut short a technical rebound after the single currency hit 2-1/2 month lows against the dollar.

Sterling fell broadly as minutes from the Bank of England's February rate-setting meeting showed policymakers voted unanimously to seek government consent for so-called "quantitative easing" though buying gilts and other securities.

The euro was down 0.2 percent at $1.2564 after rising as high as $1.2639, according to Reuters data. It had fallen to $1.2558 on trading platform EBS, its lowest since Dec. 4. It was flat at 116.18 yen.

"The risks are still heavily to the downside for the euro," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.

Sentiment remained weak for the euro as banks continued to be crippled by soured assets and a global economic downturn showed no real sign of recovery.

By 0959, sterling was down 0.6 percent at $1.4145 after hitting a low of $1.4094. The euro was up 0.7 percent at 89.00

"I think it's very likely that we see measures in place by the March meeting for (the BoE) to undertake quantitative easing, especially given what was said this time round," said George Buckley, chief UK economist at Deutsche Bank.

France's Societe Generale said on Wednesday it had eked out a small profit for the fourth quarter, compared with a big year-ago loss when it was hit by a rogue trading scandal, while ING of the Netherlands and Germany's Commerzbank reported losses.

That put pressure on European shares, which were down 1.2 percent in morning trade.

The euro also remained under pressure after Moody's Investors Service had threatened to downgrade euro zone banks with significant exposure to the weakening economies in Eastern and Central Europe, and Standard & Poor's said it may review emerging Europe bank ratings.

YEN LOSING LUSTRE?

The dollar was up 0.2 percent at 92.57 yen after rising to a more than one-month high of 92.75 yen on Tuesday.

Some analysts said the yen may be losing its lustre as a perceived "safe-haven" currency as investors became more wary after a steep contraction in Japan's economy.

"We are becoming increasingly worried that the slowdown in Japan is becoming so severe and the current account surplus is narrowing so quickly that the yen is no longer seen as a defensive play in times of crisis," said Chris Turner, head of forex strategy at ING.

Japan's economy shrank a stunning 3.3 percent in the Oct-Dec quarter of 2008 from the previous three months, or an annualised minus 12.7 percent.

The Bank of Japan will announce its rate decision after a two-day meeting concluding on Thursday, where it is expected to keep key interest rates at 0.1 percent but possible expand on further steps of buying assets to bolster demand.

Analysts seem to agree the dollar will be in favour in the near term, especially as a global economic slump continues.

Traders will watch U.S. housing starts data and industrial production figures later in the day, which are expected to reinforce the economic downturn. A recovery in the U.S. housing sector is seen critical for any broader economic rebound.

Also on Wednesday, U.S. Federal Reserve Chairman Ben Bernanke is scheduled to speak on the central bank's lending programmes and its balance sheet, while minutes from the Fed's January rate-setting meeting will be released.

Data on Tuesday showed foreigners bought a net $34.8 billion in long-term U.S. securities in December, reversing outflows in the prior month. That was tied to so-called safe-haven flows, analysts said.