Euro holds firm, yen struggles ahead of bumper central bank week -September 19, 2023 at 04:27 am EDT

LONDON/SINGAPORE, Sept 19 (Reuters) – The euro got a
lift on Tuesday from a report that indicated the European
Central Bank may soon start discussing how to drain some of the
excess liquidity in the banking system, while the yen wallowed
near 10-month lows against the dollar.

A Reuters report on Monday citing six sources said the
debate over the multi-trillion-euro pool of excess liquidity
sloshing around banks was likely to start next month.

The excess cash dulls the impact of the ECB’s rate hikes by
reducing competition for deposits and results in hefty interest
payments – and ensuing losses – by some central banks.

The euro rose by as much as 0.4% at one point on
Monday to nudge at $1.07 and, by Tuesday, had retained most of
those gains, trading flat on the day at $1.069.

However, this might not be enough to give the euro a
more sustained boost, according to Lee Hardman, a strategist at
MUFG.

“While the ECB’s reported plans to tighten excess
liquidity in the euro area have helped to support the euro, they
are unlikely to be sufficient on their own to turn the current
weakening trend,” he said.

The euro has been gradually losing steam over the last
two months, since hitting a 15-month high, as the ECB has neared
the end of its current cycle of rate rises. According to the
most recent weekly data from the U.S. regulator, speculators
have cut their bullish position in the euro to the smallest in
10 months.

This week brings a raft of central bank meetings,
including those of the Federal Reserve, the Bank of Japan, the
Bank of England and the Swiss National Bank, among others, which
kept currency volatility on the subdued side.

The yen is drawing a lot of focus at the
moment, as the BOJ prepares to meet to discuss monetary policy
on Friday.

It hit a 10-month low of 147.95 per dollar last week and
by Tuesday, was not far off that mark, flat on the day at
147.63. The last time the yen was this weak was last autumn,
when Japanese authorities intervened to prop it up.

Expectations are for the BOJ to maintain its policy of
ultra-low interest rates and reassure markets that monetary
stimulus will stay in place, at least for now, even as Governor
Kazuo Ueda stoked speculation of an imminent move away from the
central bank’s current policy stance.

“Our sense is that the BOJ needs ammunition in order to back
itself in terms of any shift or even any guidance for (a)
potential shift in policy over the coming six months to the next
year,” said Rodrigo Catril, senior FX strategist at National
Australia Bank (NAB).

“And we think that needs to happen with a set of new
forecasts, and that’s why we don’t think that we will get many
surprises on Friday.”

The U.S. dollar index hovered either side of unchanged
at 105.04, holding near last week’s six-month peak.

Money markets expect the Fed to keep rates on hold at its
upcoming meeting, according to the CME FedWatch tool, though
focus will be on the central bank’s forward guidance.

“The market is fully pricing in a hold and this meeting was
always likely to be a pass since the Fed skipped June,
effectively moving to an every-other-meeting cadence,” said Erik
Weisman, chief economist and portfolio manager at MFS Investment
Management.

“The market will be looking for any hints that the Fed may
be leaning towards another hike by year end or that a more
persistent pause is in order.”

In other currencies, sterling was flat at $1.2384,
ahead of an interest rate decision from the BoE on Thursday.

The Bank is expected to deliver another rate hike on
Thursday, but this could be its last for now, as a cooling
economy has policymakers unsettled.

(Additional reporting by Rae Wee
Editing by Lincoln Feast, Peter Graff)