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Thursday October 21, 2010 - 12:24:37 GMT
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FOREX NEWS - Euro gains vs dollar on Fed's easy policy view

8:13am EDT

* Euro higher vs dollar on Fed-ECB diverging rate views

* Dollar reverses gains made on Geithner comments in WSJ

* Traders cite Asian demand boosting euro vs dollar

(Adds comment, updates prices)

By Naomi Tajitsu

LONDON, Oct 21 (Reuters) - The euro rose against the dollar on Thursday as investors piled into the single European currency in the belief that the interest rate differential with its U.S. counterpart will continue to widen.

The dollar relinquished gains made earlier in the day as investors reckoned comments from U.S. Treasury Secretary Timothy Geithner ahead of a G20 finance ministers meeting may not have warranted a brief jump in the U.S. currency.

The dollar stayed under broad selling pressure, hovering near a 15-year low against the yen as it continued to take a beating on speculation the Federal Reserve may implement more dollar-negative quantitative easing next month.

Expectations of more Fed easing have driven three-month interbank dollar rates USD3MFSF= lower. At the same time, euro zone rates EURIBOR3MD= have risen to their highest since July last year, widening the spread between the two.

Some analysts said this widening spread, which indicates U.S. and euro zone rates are expected to diverge further, was helping push the euro higher.

"The majority of the market sees a positive interest rate differential in the euro given the difference in euro and dollar money market rates," said Stephen Gallo, head of markets analysis at Schneider Foreign Exchange.

"There is an ongoing diversification away from the dollar, and that's increasing demand for euros," he added.

The euro EUR= was at $1.4030 having climbed to a session high of $1.4050 according to Reuters data. Technical traders highlighted the euro's rally stalled at the 76.4 percent retracement of its decline from this month's high of $1.4157 to yesterday's low at $1.3696. Traders said Asian demand helped boost the single currency. Many Asian central banks have been investing their proceeds from intervention in their currency markets into euros.


Their steady intervention to drive down their currencies against a weakening U.S. dollar has led to some speculation that an agreement may be in the offing this weekend at the G20 meet.

Finance ministers and central bank chiefs from the Group of 20 meet on Friday in South Korea to discuss a common path on managing currency, trade and economic imbalances. G20 leaders will meet in Seoul next month.[ID:nTOE69K01G]

But traders said an agreement on currencies was unlikely this week given the ongoing race for some countries to weaken their currencies, and that the market was positioned for more dollar selling heading into the meeting.

Chris Turner, chief currency strategist at ING said that should the G-20 acknowledge that emerging Asia will have to reform their exchange rate systems and embrace flexibility, it would make a good start to address the global currency war.

"Such an outcome should trigger more flows into the short dollar/Asia trade," he added.

The dollar index .DXY slipped 0.3 percent to 76.937, staying near a 10-month low of 76.144 hit last week.

The dollar JPY= fell as low as 80.93 yen on Reuters data, pulling back from the day's high of 81.82 yen and closing in on 80.84 yen hit on Wednesday, its weakest since mid-1995.

The market is wary that Japanese authorities could intervene to slow the yen's rise again, after they did so on Sept. 15, selling yen for the first time in more than six years.

The dollar reversed gains made after the Wall Street Journal quoted Geithner as saying major currencies were roughly in alignment and he would use the G20 meet to move towards norms on currency policy and rebalance the global economy.

Investors initially took his comments as a cue to buy the dollar, but analysts argued Geithner's comments did not mark a significant change in U.S. forex policy, adding that this explained the pullback in the U.S. currency's gains. "What Geithner said was not targeted at the U.S. dollar. He was making his position clear before the G20 that the U.S. would not fight everybody on FX, just China," said Ulrich Leuchtmann, currency strategist at Commerzbank in Frankfurt. (additional reporting by Anirban Nag)

(Editing by Catherine Evans)

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