By William L. Watts and V. Phani Kumar, MarketWatch
FRANKFURT (MarketWatch) — The euro was unable to hang on to modest gains scored against the dollar Tuesday after Japan’s finance minister said Tokyo would use part of its foreign-exchange reserves to buy bonds issued by the European Stability Mechanism, the euro zone’s bailout fund.
The ICE dollar index DXY +0.23% , which measures the greenback against a basket of six major global currencies, traded at 80.329 compared to 80.256 in U.S. trading late Monday.
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The euro EURUSD -0.20% slipped to $1.3096 from $1.3111.
The currency had traded as high as $1.3140 after Japan Finance Minister Taro Aso expressed an interest in buying ESM bonds, with the first round of purchases likely to take place later in the day. Read more on Aso’s comments .
“Using existing [Japan foreign exchange] reserves would have no implications for [the yen,] and we would interpret the comments as more of a euro/dollar-positive event to the extent that it reinforces the trend of reserve diversification into ESM bonds and away from the [dollar],” Sue Trinh, a senior currency strategist at RBC Capital Markets, wrote in a note to clients.
The euro appears largely content to trade in a tight range ahead of the European Central Bank meeting on Thursday. Expectations for a rate cut have faded amid signs the region’s economic downturn showed signs of bottoming in the fourth quarter.
Overall, data remains largely biased to the downside, however, noted Jeremy Stretch, currency strategist at CIBC in London.
“On the back of disappointing trade data in France and Germany, weaker exports and imports, and a more modest bounce in euro business sentiment in December underline that once U.S. fiscal issues are cleared the lack of euro growth and the negative implications for the debt story are likely to come back to the fore,” he said in a note to clients.
Meanwhile, the Japanese yen appreciated against the dollar and the euro. Media reports cited government ministers as saying that Tokyo will make a 2% inflation target part of a new policy accord with the central bank, but added that the accord won’t set a deadline for reaching that target.
Indeed, the yen is “failing to continue to materially depreciate, this as there appears to continue to be a presumption of looking to buy dips,” Stretch said.
The dollar USDJPY -0.24% dropped to ¥87.54 from ¥87.83, while the euro EURJPY -0.44%fell to ¥114.65 from ¥115.12.
Among other major currencies, the British pound GBPUSD -0.28% was changing hands at $1.6073 from $1.6109, while the Australian dollar AUDUSD -0.09% was fetching $1.0495 from $1.0503.
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