Euro weakens on worries about ECB bond buys

Euro lower but supported by expectations of bold ECB
action
    * Risk of disappointment limits upside to euro


    By Gertrude Chavez-Dreyfuss
    NEW YORK, Sept 4 (Reuters) - The euro slid against the
dollar on Tuesday after two days of gains as investors grew
cautious that a European Central Bank plan to tackle the
region's debt crisis may lack detail.
    Softer-than-expected data on U.S. manufacturing further
eroded risk appetite on Tuesday, boosting the dollar's appeal as
a safe haven for some investors. 
    Investors, however, were more focused on the euro ahead of
an ECB meeting on Thursday at which policymakers are expected to
announce a bond-buying plan to help lower Spanish and Italian
borrowing costs. 
    That speculation was reinforced on Monday when ECB President
Mario Draghi said central bank purchases of sovereign bonds of
up to three years maturity did not constitute state aid.
.
    Still many traders would rather wait and see if the ECB will
 indeed deliver on its commitment to help out debt-plagued
countries in the euro zone.
    "Market participants were a little bit anxious that the ECB
may disappoint," said Steven Butler, director of FX trading at
Scotia Capital in Toronto. "It may cut rates but a lot of people
are concerned that the ECB may not be able to get its act
together to announce something really firm about the bond-buying
program."
    Any move by the ECB to stem the debt crisis is expected to
lower the additional cost of holding assets perceived to have
higher risk. 
     The euro was  last down 0.2 percent at $1.2565, not
far from the two-month high of $1.2636 touched last week. U.S.
markets were closed on Monday for the Labor Day holiday which
increased volatility in Tuesday's New York session as traders
have less time before the ECB meeting to stake their positions.
    Kathy Lien, managing director at BK Asset Management, is not
too optimistic either, noting that "during the debt crisis,
European policymakers have a track record of disappointment."
    Investors are hoping the ECB will at least reveal the range
of maturities eligible for purchase and that conditions are not
too stiff for peripheral countries to seek aid. 
    Morgan Stanley strategists said they did not expect the euro
to push much higher before the ECB meeting and would take
profits at their $1.27 target if it was reached before Thursday.
    Additionally, investors are likely to be cautious about the
euro given the economy is struggling, putting pressure on the
ECB to lower interest rates in the coming months.
    French President Francois Hollande said on Tuesday that an
EU leaders summit on Oct. 18-19 could finalize solutions, not
just on debt-stricken Greece but also Spain, whose government
has so far resisted seeking an EU bailout despite a deep
recession. 

    FED EASING PROSPECTS  
    Euro weakness against the dollar could be limited in the
near term, however, by speculation the Federal Reserve may
launch another bond buying program, known as quantitative
easing, this month to boost the struggling U.S. economy.
    U.S. nonfarm payrolls data due on Friday are expected to
provide an important gauge of the strength of the economy and
the likelihood of further Fed easing.
    The dollar briefly trimmed gains against the euro on Tuesday
after a survey showed U.S. manufacturing shrank at its sharpest
clip in more than three years in August, the third straight
month of contraction, and firms hired the fewest workers since
late 2009. 
    "It's a disappointing number that can bring the Fed a step
closer to offering more support to the U.S. economy," said Joe
Manimbo, senior market analyst at Western Union Business
Solutions in Washington. 
    The dollar was firmer against the yen, helped in part by
buying from Japanese importers. The U.S. dollar was up 0.2
percent against the yen at 78.36 yen.
    The dollar index was also up, by 0.1 percent at 81.318