* Euro holds most of relief rally gains but not out of woods
* Markets hope ECB will expand bond purchase programme
* Disappointment could see euro head back below $1.30
By Charlotte Cooper
TOKYO, Dec 2 (Reuters) - The euro sat tight after surging
higher the previous day, as investors waited to see if European
Central Bank policy makers meeting later on Thursday would take
any measures to alleviate worries over euro zone debt.
The euro posted its biggest one-day rise in more than a month
on Wednesday, in a dramatic turnaround from 11-week lows against
the dollar, as players cut short positions in the hope the ECB
might calm the region's debt crisis by taking new steps.
Analysts cautioned there was scope for disappointment,
however, saying the central bank was unlikely at this stage to
expand its bond purchase programme to support beleaguered
peripheral euro zone government debt markets as some might hope.
[]
The euro, which jumped more than 1 percent to $1.3183 on
Wednesday, eased to $1.3105 <EUR=> on Thursday as players turned
more cautious but it remained well above an 11-week low at
$1.2969 set on Tuesday.
It was fluctuating either side of its 200-day moving average
at $1.3123 and analysts said disappointment could see it resume
the fall it began in early November and head back below $1.30.
One trader in Singapore said for now, however, there were
euro bids from $1.3060 down to $1.30.
"If the ECB decide to do nothing more on bond purchases, that
could go down quite badly with European debt markets and the
euro," said Mitul Kotecha, global head of FX strategy at Credit
Agricole CIB in Hong Kong.
"If they open the door at least, it might stem a fall in the
euro but markets just want to see some concrete action."
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
What can the ECB do? []
Interactive timeline on euro zone debt crisis in 2010:
http://link.reuters.com/nyx95q
Take a Look on euro debt crisis: []
Multimedia coverage on the euro zone crisis on Top News:
http://r.reuters.com/hus75h
Euro zone graphics package: http://r.reuters.com/hyb65p
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Societe Generale analysts said in a client note if the ECB
wanted to stop contagion, it needed to announce a plan of 1
trillion euros or more over the coming quarters, but they thought
this was unlikely to happen this week -- doubts shared by many
market players.
"The ECB is already buying euro zone government bonds but it
doesn't have a target as its bond purchases are not aimed at
providing liquidity, unlike the Fed's easing," said Seiya
Nakajima, chief economist at Itochu Corp.
"Perhaps (ECB President Jean-Claude) Trichet can say that its
bond buying programme will continue. But that doesn't really
break any new ground," he added.
The ECB will announce the outcome of its policy meeting at
1245 GMT, followed by a news conference at 1330 GMT.
What analysts see as more likely is for the ECB to agree that
it would send the wrong signal if it pushed on with phasing out
unlimited liquidity measures right now, as had been expected, and
instead for it to possibly add to those liquidity measures to
ease strains.
"The ECB will make a distinction between crisis measures and
quantitative easing," said Hiroshi Yokotani, fixed income
director at Alliance Bernstein.
"It will take some measures to counter the debt crisis but at
the same time it will make sure that is not going to lead to
expansion of its balance sheet."
The euro's rebound on Tuesday was accompanied by a rally in
European equities and peripheral euro zone bonds, which saw
Spanish and Irish 10-year yields <ES10YT=TWEB> <IE10YT=TWEB>
fall.
A U.S. official also told Reuters that Washington would
support boosting an EU rescue facility via IMF funds, although a
Treasury Department spokesman later said an "extra commitment is
not something we're discussing right now". [].
If the euro does rise, the trader in Singapore said there
were automatic buy orders up in the $1.3190 to $1.3200 region.
A Japanese newspaper report that North Korea could carry out
shelling against mainland South Korea before year end encouraged
players to close out some riskier positions in early Asian trade,
taking a little shine off the euro and Australian dollar,
although share markets around the region rose. []
The euro eased 0.2 percent to 110.36 yen <EURJPY=R>, after
rising nearly 2 percent on Wednesday, while the Australian dollar
lost 0.3 percent to 81.30 yen <AUDJPY=R>.
The Aussie was hit by an unexpected fall in Australian retail
sales, which dented hopes for an economic revival in the fourth
quarter but it recouped much of those losses to trade at $0.9670
<AUD=D4>, down 0.1 percent on the day.
The U.S. dollar was little changed against the Japanese yen
at 84.13 yen <JPY=>, not far from a two-month high of 84.41 yen
hit earlier in the week.
A strong reading in U.S. jobs data on Friday could prompt a
test of a major psychological resistance at 85 yen, traders said.
(Additional reporting by Ian Chua in Sydney and Hideyuki Sano in
Tokyo and contribution by Reuters FX analyst Rick Lloyd in
Singapore; Editing by Joseph Radford)
