Euro clings near 2-month high as Fed stays cautious

By Hideyuki Sano

TOKYO | Wed Jan 26, 2011 8:12pm EST

TOKYO (Reuters) - The euro clung near a two-month high on Thursday after the U.S. Federal Reserve showed no haste to scale back its easy policy, disappointing some dollar bulls who had expected slightly more hawkish language.

The contrast between the Fed's emphasis on efforts to cure high unemployment and the European Central Bank's growing concerns on inflation could help the euro test its November 22 high of $1.3786, analysts said.
The euro was flat at $1.3705 in early Asian trade on Thursday, within sight of a 2-month high of $1.3723 hit on Wednesday and an option barrier at $1.3725.
The Fed voted unanimously to hold interest rates steady and repeated that rates would remain exceptionally low for an extended period, offering only a very slight upgrade to its assessment of the U.S. economy.

"The Fed didn't really stress an improvement in the economy. Because some market players had speculated that the Fed could become more hawkish, the dollar slipped back," said Masafumi Yamamoto, chief FX strategist at Barclays Capital.
For the euro, however, many analysts see more near-term upside, noting signs of some stability in euro zone periphery countries' bond markets.

"The downside risk for the euro is retreating. The euro could rise to around $1.38 in the near term. There could be some adjustments but we expect the euro to rise to around $1.40," said Masafumi Yamamoto, chief FX strategist at Barclays Capital.
ECB Governor Jean-Claude Trichet may also show a clear stance toward exiting the bank's current easy policy after a policy meeting next week, said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp.

Uno said the euro was likely to rise to around $1.38-39 next week, noting that a break of its November 22 high of $1.3786 would probably push the euro into a new trading range around $1.38-40.
But other market players suspect the euro could step back in the near term as its rally from a four-month low of $1.2860 set on January 10 has come without a major adjustment.
The dollar changed hands at 82.20 yen, showing little sign of breaking out of its recent 82.00-83.50 yen range.

Strong bids at and below 82 yen should keep its decline in check, traders said but added that if it does break below 81.85, a low last week, they would have to shake off entrenched expectations of range-bound trade.
The dollar index against a basket of major currencies hovered at 77.748, just above a 10-week low of 77.689 hit on Wednesday.