Euro at Risk on Critical Test in ongoing Greek Debt Crisis

DailyFX.com –

  • Greek debt difficulties threaten to force important Euro volatility
  • Key debt auction on April 8, 2015 a key event on the calendar
  • Failure to roll over existing debt raises the threat of Greek default

We’ve recently written on why Greece remains a major threat to financial market stability and the Euro currency itself. And indeed those tensions may be coming to a head as traders send EUR/USD volatility prices significantly higher ahead of the upcoming Greek debt auction. The central point is clear: if Greece fails to refinance expiring Treasury Bills at an acceptable rate, the risks of a larger Greek government default grows significantly.

Key Dates Continue to Warn of Substantial Volatility

April 8 Greek Government to auction €875 million in 178-Day Treasury Bills

April 9 – Greece is to pay €460m to the IMF under terms of first bailout agreement.

April 14 €1,400m of short-term Greek Treasury Bills mature, forcing Greece to roll over into new debt.

April 15Greek Government to auction yet-undetermined amount in 3-month Treasury Bills

A look at FX volatility prices show that traders predict volatility will be especially high through tomorrow’s close, while 1-week and 2-week volatility prices are significantly above even one-year options.

Euro 1-Day Volatility Prices Are Substantially Above 1-Year Prices – Underline Urgency

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Euro at Risk on Critical Test in ongoing Greek Debt Crisis

Data source: Bloomberg. Chart source: R, ggvis

As we wrote last week, some of the most sophisticated traders in the world believe that the coming two weeks will bring substantially more uncertainty than the coming year. This is somewhat illogical—there’s far more you can’t know about 365 days in price action than you can expect in 24 hours. Yet it underlines the urgency of upcoming risks.

What’s at Stake?

If the Greek government fails to hold a successful auction for a relatively modest €875 million in 178-Day Treasury Bills it will signal that investors have all but lost confidence in its solvency.

As it stands most of the Greek government’s short-term debt is held by domestic banks. In normal circumstances those same banks might step in and buy more Greek debt. Yet the domestic financial sector is heavily dependent on substantial Emergency Liquidity Assistance (ELA) from the European Central Bank for its own liquidity. European officials have already told Greek banks that they are not to increase their holdings of short-term government debt.

Demand for tomorrow’s auction will have to come from private investors—domestic or abroad—to cover any gaps for the embattled Greek Treasury. The secondary market for the maturing debt shows that private investors are demanding a usurious 35 percent effective annual yield for debt maturing next week. This is a dangerous signal that private demand will not cover the shortfalls of what Greek banks cannot buy themselves.

Yield to Maturity on Greek Treasury Bills due April 14 Surges to Usurious 35 Percent

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Euro at Risk on Critical Test in ongoing Greek Debt Crisis

Data source: Bloomberg Generic Pricing (BGN). Chart Source: R

The apparent lack of private demand for its Treasury Bills leaves the Greek Government at risk, and ultimately its best hope may rest on purchases from other sovereign governments. And indeed Greek Government officials have made very public overtures to curry favor with Chinese and Russian governments as of late. Whether or not this results in actual bond buying remains to be seen.

Euro Reactions are Far from Predictable

We’re entering a critical stretch for the ongoing Greek sovereign debt crisis, and the next 24 hours may determine near-term direction in the Euro and domestic financial markets.

If the upcoming Greek debt auction fails to elicit sufficient interest, we could see substantial Euro volatility and broader financial market turmoil. Heightened sovereign risks could discourage market makers from making prices in EUR pairs, and in effect this means that the Euro could both rally and fall sharply on any news headlines.

Any surprises could force substantial market moves, and traders should limit trading leverage—particularly in EUR pairs—ahead of the key dates.

— Written by David Rodriguez, Quantitative Strategist for DailyFX.com

Contact and follow David via Twitter: https://twitter.com/DRodriguezFX

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Currencies: Dollar extends drop vs. euro after payrolls-inspired selloff

The euro edged higher versus the dollar Monday, extending gains scored Friday after weaker-than-expected nonfarm payrolls data saw investors push back expectations for a rate hike by the Federal Reserve.

The euro EURUSD, +0.55%  traded at $ 1.0991, up from $ 1.0972 in North American trade late Friday. The U.S. currency USDJPY, -0.04%  was up versus the Japanese yen at ¥119.07 compared with ¥118.93 late Friday in New York.

The ICE dollar index DXY, -0.16% a measure of the U.S. currency against a basket of six major rivals, was up 0.1% at 96.651.

Trading activity in Asia and Europe was subdued, with many traders still away from their desks for the Easter vacation and other public holidays. The dollar found downside support against the yen to stabilize above ¥119 following Friday’s losses.

Japanese importers and institutional investors were among the investors eager to buy the greenback on dips. Market participants also noted some indirect support for the dollar against the yen via selling of the Japanese currency against the euro.

Friday’s tumble in the dollar was the biggest fall in almost two weeks following U.S. labor data for March that showed nonfarm payrolls grew by 126,000, about half the increase forecast by economists in a Wall Street Journal survey.

Read: Poor jobs report blurs economic outlook

“There is speculation that the consensus about a U.S. rate increase is now being pushed back to December from September,” a change in views that could lower the dollar in currency trade, said Mizuho Securities FX strategist Kenji Yoshii.

Disappointing March jobs report: Will the Fed move?

The March jobs picture and how it relates to the broader U.S. economy.

Even so, Yoshii said he didn’t “get the impression that the USD is falling very much.” He added that larger falls in the dollar are likely being prevented by a cycle in which a weaker dollar causes U.S. stocks to rise, suggesting greater buoyancy in risk-taking sentiment that results in selling away from the perceived safety of the yen and a stronger dollar.

Read: Don’t fight the Fed; invest with it

IG Securities market analyst Juniichi Ishikawa said in a note that the dollar could fall below ¥118 if U.S. stocks soften this week. Mr. Ishikawa said the reaction of U.S. shares to Friday’s downbeat labor data could push the dollar down against the yen later Monday if the shares fall. U.S. indicators, including today’s ISM non-manufacturing business index, and U.S. corporate earnings will also be under the spotlight this week.

“We are going to have a week of closely monitoring the after effects of the lackluster U.S. data and the impact of (U.S.) quarterly earnings,” he said.

The WSJ Dollar Index BUXX, -0.35% a measure of the dollar against a basket of major currencies, was donw 0.1% at 86.54.

GLOBAL MARKETS-Wall St retreats, Euro heads for record quarterly drop

* Euro heads for biggest quarterly fall since introduction

* Greek debt negotiations weigh on euro, dollar gains

* U.S. stocks off despite strong consumer confidence, M&A

* Crude sags as Iran’s nuclear talks deadline looms

By Sinead Carew

NEW YORK, March 31 (Reuters) – U.S. stocks retreated on Tuesday from the previous session’s rally, though major indexes were headed for a positive first quarter, while the euro was on track for its biggest quarterly fall as worries about Greece kept the currency under pressure.

The European Central Bank’s one-trillion-euro economic stimulus program, launched this month, has weakened the euro and prompted investors to pile into euro zone shares on bets currency weakness, low borrowing costs and cheap oil will boost European companies’ profits.

The euro was last down 0.7 percent against the dollar Its dive has been the dollar’s gain, with the greenback recording its biggest quarterly rise against the world’s top six currencies since 2008.

Meanwhile U.S. stocks have been choppy as investors await the Federal Reserve’s first interest rate hike in almost a decade.

Wall Street saw some support on Tuesday after U.S. consumer confidence unexpectedly rebounded in March. It was also helped by two days of corporate acquisition announcements including several biotech deals on Monday and Charter Communications’ plan to buy Bright House Networks for roughly $ 10 billion.

But this was not enough to turn the market higher.

“Today’s move is largely in reaction to yesterday, a back-to-normal session, but our view on the market is still constructive. As we see continued acquisition deals, that will be supportive for the backdrop,” said James Dunigan, chief investment officer at PNC Wealth Management in Philadelphia.

The Dow Jones industrial average fell 63.59 points, or 0.35 percent, to 17,912.72, the S&P 500 lost 5.22 points, or 0.25 percent, to 2,081.02 and the Nasdaq Composite dropped 13.28 points, or 0.27 percent, to 4,934.16.

There was a 0.5 percent dip on the pan-European FTSEurofirst 300 index as traders squared up for the quarter end.

New euro zone data showed a small pickup in inflation following the launch of the ECB’s stimulus, and with the program set to run for a year and a half, investors remain upbeat on the region.

Greece’s debt negotiations have made investors uneasy on both sides of the Atlantic. Germany’s Chancellor Angela Merkel said on Monday Athens had a certain degree of flexibility on which reforms to implement but stressed that they must “add up”.

Greece’s leader Alexis Tsipras responded by appealing for an “honest compromise” but warned he would not agree to unconditional demands.

Japan’s Nikkei finished the first quarter with a chunky 10 percent gain and the often volatile Shanghai Composite Index hit another seven-year high and gained 16 percent for the quarter on bets of more stimulus from Beijing.

Oil took a slide on prospects that OPEC member Iran could reach a deal with six world powers on its nuclear program that could allow Tehran to sell more of its oil onto an already saturated market.

U.S. crude was last down 1.4 percent at $ 48.00 per barrel while Brent fell 2 percent to $ 55.18.

(Additional reporting by Marc Jones in London, Shinichi Saoshiro in Tokyo and Ryan Vlastelica in New York; Editing by Catherine Evans, Susan Fenton and James Dalgleish)

Greek Uncertainty Leans On The Euro

The euro fell against the greenback on Monday as uncertainty swirled over whether or not Greece’s negotiations with its international creditors will get solved in the next 21 days. It is rumored Greece will run out of cash by April 20.

Meanwhile, with Good Friday making it a holiday-shortened trading week for most currency traders, many would likely prefer to escape this month unscathed to begin the second quarter next week. However, with U.S. nonfarm payrolls (NFP) data rounding out the week, it may not be such an easy task to complete without experiencing some collateral damage.

Investors should be thankful that Group of 10 central bank activity does actually slow down considerably this week heading into the Easter break. In the U.K., the Bank of England’s policy members make it easy for investors: they have undertaken ‘self-exile’ during the U.K.’s two-month election season that is officially underway.

In the U.S., Federal Reserve members are very active on the talking circuit this week with Vice Chair Stanley Fischer speaking on Monday, and Chair Janet Yellen on Thursday. Neither is expected to give any interest rate hike clues away as both are giving introductory remarks at separate conferences. On Tuesday, Federal Reserve Bank of Richmond President Jeffrey Lacker speaks on the country’s economic outlook. This ‘hawk’ is unlikely to challenge consensus of a patient Fed waiting until September or eve
n later for it to begin raising interest rates. By the end of this week’s Fed speech circuit, investors will probably be none-the-wiser as to when and how aggressive the Fed will be with respect to interest rates.

U.S. Jobs Data in View

Capital markets will probably need to take interest rate timing clues from this Friday’s U.S. NFP report. Ever since Yellen began the process of weaning investors off central bank dependence, and nudging the market toward fundamental data reliance, the U.S. jobs report has taken on much more significance. Especially since the U.S. economy has, of late, exhibited signs of a slowdown due to excessively cold weather. Many are looking for this past winter’s cold snap to have finally taken a modest bite out of NFP (expected +247,000 versus +295,000; unemployment rate unchanged at +5.5%). If that does not happen, it could reinforce how strong the underlying U.S. labor market truly is, and will have money-market traders pricing in an earlier rate hike. Investors should remain wary of any weather-related anomalies. For a more accurate rate guidance, look to the wage growth component of the report. Until now, there has been very little sign that tighter labor market conditions are supporting wage growth.

Euro Traders Seek Direction

Last week, the EUR bounced around in a contained range twice threatening to breakthrough resistance at €1.1052, before falling back to this morning’s EUR/USD lows ahead of the psychological €1.0805 handle. On the international money market, speculative EUR short positions hit new records, suggesting more covering is likely. However, there is a clear market willingness to add or establish more EUR short positions on any U.S. dollar pullbacks. The EUR bear must be feeling fairly confident with their short positions, especially with the lack of EUR bounce follow through considering the depth of the record short positions.

FX options indicate big euro/dollar swings may pause

imageLONDON: Recent sharp swings in the euro/dollar exchange rate have not been matched by moves in the currency options market, as a cautious outlook from the U.S. Federal Reserve pushes back expectations of when rates will rise.

The euro, which hit a 12-year low of $ 1.04570 the day before the Fed meeting began, jumped to a high of $ 1.10625 in the hours after Fed Chair Janet Yellen hinted on March 18 that interest rates would not be raised in a hurry.

It was the biggest one-day percentage jump in euro/dollar in six years and was followed a day later by its second-biggest fall since November 2011.

But in the options market, one-month euro/dollar implied volatility, a gauge of how sharp swings will be in the pair and used by investors to hedge exposure, has fallen towards levels last seen before the Federal Reserve’s March 17-18 meeting.

It was at around 11.4 percent on Wednesday, down from 13 percent on Monday and 12.7 on March 16.

“The more accommodative Fed policy stance means more liquidity and that should see the short end of the implied volatility curve head lower,” said Adam Myers, European head of FX strategy at Credit Agricole.

“At the same time, chances that the Fed could start tightening in September will keep a bid at the longer end.”

This suggests euro/dollar may enter a period of range-bound trading before resuming its trek lower.

Fed policymakers lowered their median estimate for the federal funds rate — the so-called “dot plot” — and sent a more dovish message than many were expecting. Investors pushed back expectations for a rate hike to September from June.

Yellen also flagged some discomfiture about the dollar’s strength and its impact on U.S. inflation.

That triggered a sell-off in the dollar, which has lost 3.5 percent since hitting a 12-year high of 100.39 against a basket of currencies on March 13.

The euro, which many still expect to drop towards parity with the dollar in coming months as the European Central Bank unleashes its asset-buying programme, has stabilised just below $ 1.10 as investors trim bets against it.

Traders said that unless the euro drops below $ 1.08 or sustains gains above $ 1.10, demand for short-dated options to hedge against sharp moves will be low.

“After such a huge risk event like the Fed, it is but natural for short dated implied vols to come off,” said a chief options trader at a European bank. “It could go down a bit more before stabilising.”

Analysts said the uncertainty about the Fed rate outlook would support implied longer-dated volatilities, especially those maturing in September and later.

“The stage is set for a noisy run-in to mid-year lift-off amid poor and possibly deteriorating liquidity,” JPMorgan’s Arindam Sandilya wrote in a note.

Copyright Reuters, 2015

Euro tumbles through $US1.09

The euro has tumbled through the $ US1.09 level to strike a fresh 11.5-year low as the ECB nears the launch of its massive stimulus package and strong US jobs data raises the possibility of a US rate hike soon.

The single currency sank to $ US1.0845 as European markets closed on Friday – the lowest since September 2003 – after strong non-farm payrolls data increased expectations that the US Federal Reserve may move to begin hiking interest rates in the coming months.

But with the ECB to begin its 1.1-trillion-euro quantitative easing stimulus on Monday, most eurozone stock markets pushed higher.

Frankfurt’s benchmark DAX 30 index of top companies closed up 0.41 per cent to 11,550.97 points after reaching an intra-day record high of 11,600, while in Paris the CAC 40 rose 0.02 per cent to 4,964.35 points.

On the downside, London’s FTSE 100 index ended the day down 0.71 per cent to 6,911.80 points, having posted a record closing high on Thursday after the ECB announced its bond purchases will start next week.

The euro tanked against the US dollar after the US Labor Department said on Friday that the US economy pumped out a stronger-than-expected 295,000 net new jobs in February.

Analyst Craig Erlam said the good jobs numbers ‘will only feed into expectations for a rate hike from the Federal Reserve in June.’

‘The rally in the dollar immediately after the release clearly supports this view …,’ he added.

Higher interest rates will make the dollar attractive, while the ECB’s stimulus program will flood the economy with euros and weaken its value.

Some analysts predict the eurozone unit could reach parity against the dollar amid a growing policy divergence between the ECB and the Fed.

The Frankfurt-based central bank is battling deflation risks across the 19-nation eurozone, while its US counterpart exited its own QE program in October, and is mulling an interest rate hike later this year amid optimism over the American economy.

‘Diverging policy stances between the Fed and ECB look set to persist for some time, pushing the euro towards parity over the medium-term as the search for yield drives euro area investors to increase exposure to overseas assets,’ RIA Capital Markets analyst Nick Stamenkovic told AFP.

However, Rabobank analyst Jane Foley cautioned that the Fed was mindful of weak US inflation.

‘The ECB has indicated that it is prepared to throw the kitchen sink in with its attempts to beat deflationary risk and the resultant weakness of euro/dollar will undoubtedly help with the policy’s success.’

She added: ‘We do not think that the Fed will hike (rates) until December, based on weak inflation. Consequently we think that euro/dollar will avoid parity.’

But Wall Street stocks traded mostly lower Friday as investors bet on a quicker rate hike.

In late morning trading, the Dow Jones Industrial Average slumped one per cent to 17,954.20 points.

The broad-based SP 500 creeped up 0.12 per cent to 2,101.04, while the tech-rich Nasdaq Composite Index lost 0.74 per cent to 4,945.77.

Tech giant Apple traded one per cent higher after an early boost of 2.2 per cent on news it will join the prestigious blue-chip Dow index, replacing ATT. ATT was down 0.87 per cent as noon neared.

In European equities trading, Britain’s mining sector was hit particularly hard by sliding iron ore prices.

At the close Fresnillo sank 5.16 per cent to 698.50 pence, Randgold Resources dropped 5.27 per cent to 4,581 pence and Anglo American slid 2.45 per cent to 1,136 pence.

‘The FTSE 100 may have posted a new record close last night but (today’s) trade is being overshadowed by another drop in iron ore prices,’ said Trustnet Direct analyst Tony Cross.

‘Heavyweight mining stocks are languishing at the foot of the table as the price moved below $ US60 per tonne into territory where it is difficult to make any margin.’

Asian markets diverged Friday despite encouraging gains in New York.

Tokyo stocks soared 1.17 per cent thanks to a weaker yen and Seoul closed 0.73 per cent higher.

But Hong Kong shed 0.12 per cent and Shanghai slid 0.22 per cent, with investors subdued a day after China lowered its economics growth target for 2015.

Project Syndicate: How far will the euro fall?

LONDON (Project Syndicate) — The U.S. dollar is hitting new 12-year highs almost daily DXY, -1.28%  , while the euro EURUSD, +1.50%  seems to be plunging inexorably to below dollar parity. Currency movements are often described as the most unpredictable of all financial variables. But recent events in foreign-exchange markets seem, for once, to have a fairly obvious explanation — one that almost all economists and policy makers accept and endorse.

French President François Hollande, for one, has ecstatically welcomed the plunging euro: “It makes things nice and clear: one euro equals a dollar,” he told an audience of industrialists. But it is when things seem “nice and clear” that investors should question conventional wisdom. A strong dollar and a weak euro is certainly the most popular bet of 2015. So is there a chance that the exchange-rate trend may already be overshooting?

Also read: The dollar’s meteoric rise may be just about over

In one sense, the conventional explanation of the recent euro-dollar movement is surely right. The main driving force clearly has been monetary divergence, with the Federal Reserve tightening policy and the European Central Bank maintaining rock-bottom interest rates and launching quantitative easing. But how much of this divergence is already priced in? The answer depends on how many people either are unaware of the interest-rate spread or do not believe that it will widen very far.

Last year, many investors questioned the ECB’s ability to launch a bond-buying program in the face of German opposition, and many others doubted the Fed’s willingness to tighten monetary policy, because doing so could choke off the U.S. economic recovery. That is why the euro was still worth almost $ 1.40 a year ago — and why I and others expected the euro to fall a long way against the dollar.

But the scope for dollar-bullish or euro-bearish surprises is much narrower today. Does anyone still believe that the U.S. economy is on the brink of recession? Or that the Bundesbank has the power to overrule ECB President Mario Draghi’s policy decisions?

With so much of the monetary divergence now discounted, perhaps we should focus more attention on the other factors that could influence currency movements in the months ahead.

On the side of a stronger dollar and weaker euro, there seem to be three possibilities.

One is that the Fed could raise interest rates substantially faster than expected. Another is that investors and corporate treasurers could become increasingly confident and aggressive in borrowing euros to convert into dollars and take advantage of higher U.S. rates. Finally, Asian and Middle Eastern central banks or sovereign wealth funds could take advantage of the ECB’s bond-purchase program to sell increasing proportions of their German, French, or Italian debt and reinvest the proceeds in higher-yielding U.S. Treasury securities.

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These are all plausible scenarios. But at least four factors could push the dollar-euro exchange rate the other way.

First, there is the effect of the strong dollar itself on the U.S. economy and its monetary policy. If the dollar continues to rise, U.S. economic activity and inflation will weaken. In that case, the Fed, instead of raising interest rates faster than expected, will probably become more dovish.

Euro gains vs dollar as traders eye Fed for interest rate clues

imageLONDON: The euro rose for a second day against the dollar on Tuesday as investors awaited the start of a two-day US Federal Reserve policy meeting that will test expectations of a mid-2015 rise in US interest rates.

The single currency had come under pressure after the European Central Bank began a bond-buying programme last week that will pump more than one trillion euros of newly created money into the euro zone economy.

But the euro won some relief on Monday after weaker-than-expected US manufacturing, industrial output and housing data pushed down US debt yields and cooled the dollar’s advance.

The US currency’s surge since early March has been driven by solidifying expectations that the Fed’s Open Market Committee (FOMC) will point towards a June rate rise by dropping a pledge to be “patient”.

The dollar has gained around 20 percent against a basket of major currencies over the past six months and some investors speculate that the Fed cannot ignore how much that rise reduces pressure on inflation.

Derek Halpenny, European head of global markets research at Bank of Tokyo-Mitsubishi UFJ in London, reckoned the removal of the word “patient” was “pretty much a done deal”, but that investors were nevertheless eager to take risk off their books ahead of the Fed meeting.

“There are so many other angles that (Fed Chair Janet) Yellen could go at to paint a picture of caution and the potential for the first move to be beyond June,” he said.

“If you’ve been short euro over the past week, you’ve had a good week, and why would you bother running the risk into what is a difficult event to predict?” Having hit a 12-year low of $ 1.0457 at the start of the week, the euro was up 0.2 percent at $ 1.0589 on Tuesday morning. The dollar was around 0.1 percent lower against a basket of major currencies.

Traders will also keep an eye on how other asset markets react to the Fed’s statement and comments from Yellen after the meeting.

“The main point is how Treasury yields respond to the Fed. Despite the removal of “patience”, prospects of a September, rather than June, rate hike may linger, given the dollar’s appreciation and lower oil prices,” said a currency trader at a large Japanese bank.

The dollar inched up 0.1 percent to 121.42 yen, stuck in a relatively narrow range since advancing to an eight-year high of 122.04 on March 10.

The Bank of Japan concluded its two-day policy meeting on Tuesday, at which the central bank stood pat on monetary policy and maintained its massive stimulus. Market reaction was limited because the outcome was as expected.

Copyright Reuters, 2015
UK-MARKETS-GLOBAL:Asian shares rise on bets Fed may stay cautious
A pedestrian is reflected in an electronic board showing the graph of the recent fluctuations of Japan’s Nikkei average outside a brokerage in Tokyo March 13, 2015. REUTERS/Yuya Shino

By Ryan Vlastelica

NEW YORK (Reuters) – Stocks mostly fell on Tuesday as the Federal Reserve opened a two-day policy meeting, which is being closely watched for signs of when the U.S. central bank will raise interest rates.

Trading was volatile in other asset classes. Crude oil prices edged lower and remained on track for their eighth decline in the past nine sessions, but were well off lows of the day. The U.S. dollar index turned flat, rebounding off earlier weakness.

The euro , which recently hit a 12-year low, rose against the dollar for a second straight session, though it was off its session peak.

European equity markets retreated from gains built on the euro’s decline, which cheapens the price of exports from the euro zone. London’s market <.ftse> was an exception, and Asian markets ended higher.

U.S. crude oil hit a six-year low of $ 42.63 a barrel before paring losses to trade down 0.2 percent, at $ 43.79. The recent weakness has come on oversupply and the possibility that a nuclear agreement with Iran could add to the glut.

Brent crude fell 1.3 percent to $ 53.22 per barrel.

Investors were awaiting the release of the Fed’s policy statement on Wednesday afternoon. Many analysts expect the Fed to remove the word “patient” from its statement to describe its approach to raising rates later in the year. Doing so would put the Fed a step closer to its first rate hike since 2006.

Economists polled by Reuters are almost evenly split on whether a rate increase will come in June or later in the year. Recent U.S. data, including Tuesday’s on February housing starts, has fuelled talk that the Fed will remain on hold as long as possible.

“A lot of today’s decline is speculation on how the Fed will respond, along with the sense that (U.S.) growth is weak,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.

The Dow Jones industrial average <.dji> fell 137.69 points, or 0.77 percent, to 17,839.73, the S&P 500 <.spx> lost 9.54 points, or 0.46 percent, to 2,071.65, and the Nasdaq Composite <.ixic> dropped 4.05 points, or 0.08 percent, to 4,925.46.

The MSCI International ACWI price index <.miwd00000pus> slipped 0.2 percent while European shares <.fteu3> ended 0.7 percent lower, a day after hitting a 7-1/2-year high.

The benchmark 10-year U.S. Treasury note rose 11/32 in price, pushing the yield down to 2.0594 percent.

The euro rose 0.2 percent to $ 1.0592, having earlier risen as much as 0.8 percent. Earlier this week, the euro dropped to a 12-year low of $ 1.0457 .

The U.S. dollar index, which measures the greenback against a basket of major currencies, was flat at 99.612. On Monday, the index posted its biggest drop in more than a month.

Gold prices fell 0.4 percent while silver was down 0.4 percent. Copper lost 1 percent in its second straight daily decline.

(Editing by Dan Grebler and Leslie Adler)

Reuters

FOREX-Euro continues bounce; Fed eyed for interest rate clues

* Euro gains against dollar for second straight day

* Traders taking risk off table ahead of Fed policy meeting

* BOJ stands pat on policy, market reaction limited

By Ahmed Aboulenein

LONDON, March 17 (Reuters) – The euro rose for a second day against the dollar on Tuesday as investors awaited the start of a two-day U.S. Federal Reserve policy meeting that will test expectations of a mid-2015 rise in U.S. interest rates.

The single currency had come under pressure after the European Central Bank began a bond-buying programme last week that will pump more than one trillion euros of newly created money into the euro zone economy.

But the euro won some relief on Monday after weaker-than-expected U.S. manufacturing, industrial output and housing data pushed down U.S. debt yields and cooled the dollar’s advance.

The U.S. currency’s surge since early March has been driven by growing speculation that the Fed’s Open Market Committee (FOMC) will point towards a June rate rise by dropping a pledge to be “patient”.

The dollar has gained around 20 percent against a basket of major currencies over the past six months as investors bet the Fed will be the first major central bank to raise rates since the financial crisis. But some reckon the Fed cannot ignore how much that rise reduces pressure on inflation.

“Our view is that the Federal Reserve will indeed drop the word ‘patient’ from the statement but it will be very cautious nonetheless,” said Alvin Tan, currency strategist at Societe Generale in London.

“The profit-taking continues from yesterday following the poor U.S. data that we had and the market is being cautious ahead of the FOMC meeting.”

Having hit a 12-year low of $ 1.0457 at the start of the week, the euro was up a third of a percent at $ 1.0603. The dollar was around 0.1 percent lower against a basket of major currencies.

Derek Halpenny, European head of global markets research at Bank of Tokyo-Mitsubishi UFJ in London, said investors were keen to take risk off their books ahead of the Fed meeting.

“If you’ve been short euro over the past week, you’ve had a good week, and why would you bother running the risk into what is a difficult event to predict?”

The dollar was up 0.05 percent to 121.28 yen, stuck in a relatively narrow range since advancing to an eight-year high of 122.04 on March 10.

The Bank of Japan concluded its two-day policy meeting on Tuesday, at which the central bank stood pat on monetary policy and maintained its massive stimulus. Market reaction was limited because the outcome was as expected.

(Additional reporting by Jemima Kelly in London; Editing by Mark Trevelyan)