Prospect of German recovery offers relief to euro

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(Forex Update 3: Tues 23/09/14 19:19:42)

LONDON (Sept 23): The euro pulled away from a 14-month trough against the dollar on Tuesday, earning some relief from a business survey showing Germany's economy probably expanded in the third quarter.

The common currency rose to $1.2896, recovering from Monday's 14-month low of $1.2816 and prompting some traders to suspect it might correct higher as key support near $1.2800 loomed. Traders said a move above Sept. 18 highs of around $1.2830 was needed for sustained gains.

"The euro has moved up a bit, but I would look to sell into the rise. Clearly the German composite PMI reading was better, but what is worrying is the slide in the index for manufacturing towards the contraction territory," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

The German composite PMI, rose to 54.0 from 53.7 in August, moving further above the 50 mark denoting growth.

The corresponding survey for the euro zone, however, showed business activity expanding at a slightly weaker pace than expected as firms cut prices for the 30th month in a row. Overall, the data did little to alter the picture of a sluggish recovery in the euro zone.

European Central Bank President Mario Draghi reiterated on Monday that the bank is ready to use additional unconventional tools if needed to spur growth in the bloc.

Still, there is scepticism that the ECB would launch a bond-buying stimulus program any time soon, offering support to the euro.

"We've seen the single currency move away from the $1.28 level, as the market has yet to be convinced that the ECB can deliver the balance sheet expansion that the ECB President has promised," said Simon Smith, chief economist at FxPro.

Draghi had said earlier this month that the latest easing measures, which include buying asset-backed securities and offering cheaper long term loans to banks, will expand ECB's balance sheet to levels close to seen in early 2012.

The ECB balance sheet stood around 3 trillion euros then compared with around 2 trillion now. But last week's take up of cheap long term loans by banks fell well short of expectations.

"This makes the advent of full-blown QE more likely as a means towards achieving this, but it's not clear that the ECB has a consensus on the Governing Council to start QE at this point in time," Smith added.

Quantitative easing, or buying large amounts of sovereign debt, faces strong resistance in Germany.

Dollar pauses

The euro's rise, saw the dollar index shed 0.4 percent. The index last traded at 84.434, having peaked at 84.861 on Monday, a high not seen since July 2010. It has posted 10 straight weeks of gains as markets wagered U.S. rates would rise long before those in Europe or Japan.

The dollar's run even prompted New York Federal Reserve Bank president William Dudley to caution that the gains could complicate the Fed's job, potentially hurting U.S. economic performance and pushing down inflation.

Dudley said on Monday that while the value of the dollar is not a policy goal of the Fed's, it had to be taken on board as part of the central bank's economic forecast.

Against the yen, the dollar eased 0.3 percent to 108.45 yen , down from a six-year high of 109.46 set on Friday.

There was not much boost for either the Japanese currency or its safe-haven peer the Swiss franc to news the United States and partner nations had carried out the first air strikes against Islamic State in Syria, opening a new front in the battle against militants.

The Australian dollar rose after a private survey showed that activity in China's manufacturing sector unexpectedly picked up in September.

The Aussie dollar rose 0.5 percent to $0.8915, pulling away from Monday's seven-month low of $0.8851.

Concerns about slowing Chinese growth and a big drop in the price of iron ore, Australia's top export earner, have added to pressure against the Australian dollar, which has slid 4.7 percent this month. Chinese steel and iron ore futures have fallen to record lows this week.