Swedish crown slides after Riksbank surprises with cut to zero

Credit: Reuters/Kim Hong-Ji

1 of 2. U.S. one-hundred dollar bills are seen in this photo illustration at a bank in Seoul August 2, 2013.

Expectations of more dovish comments from the Federal Reserve, due to kick of its closely-watched two-day policy review later in the session, also weighed on the greenback.

The greenback eased to 107.805 yen JPY=, retreating from Monday's near three-week peak of 108.38.

It also ceded a bit of ground against the euro, which last traded at $1.2711 EUR= off Monday's low of $1.2665.

The dollar was lifted earlier on Monday after a closely-watched Ifo report showed German business sentiment in October hit its lowest level in almost two years.

But support for the U.S. currency faded after weaker-than-expected U.S. housing data was released later in the session, pushing Treasury yields lower.

Data also showed U.S. services sector activity slowed in October to a six-month low, while manufacturing output in Texas dipped, pointing to some moderation in economic growth early in the fourth quarter.

The soft data reinforced expectations that the Fed will reassure markets that any interest rate hikes are a long way off even as it ends its massive bond-buying stimulus.

The Fed kicks off its policy review later on Tuesday and is all but certain to announce the completion of its quantitative easing program when it wraps up its two-day meeting.

'Trade overnight had a very distinctive feeling of 'wait and see',' said Evan Lucas, market strategist at IG.'With the end of the asset purchase program a foregone conclusion, speculation is once again mounting about the movement of interest rates.'

But with U.S. inflation weak, the European economy stumbling and the dollar on the rise, markets are keen to see if Fed officials will acknowledge risks to their expectations that the U.S. recovery will continue to strengthen.

Sweden's Riksbank, another central bank under pressure to support its economy, was widely expected to announce stimulus steps later in the day and join peers with rock bottom rates already in place amid flagging demand from the euro zone.

The Riksbank is seen slashing its main interest rate, the repo rate, from 0.25 percent to a record low just above zero to fight stubbornly low inflation.

Looser monetary policy in the euro zone, which is Sweden's most important trading partner, generally spells a stronger Swedish crown versus the euro, adding to the downward pressure on inflation.

'The Swedish economy is in a very tough situation as it depends heavily on external demand. It has to try and alter currency levels to address this, but since such methods are considered taboo among developed economies, it has to accomplish its aim through monetary easing,' said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

'In this respect, the Riksbank can learn from the Bank of Japan,' said Murata, who is bracing for the Swedish crown to weaken to as much as 9.5 to the euro.

The crown was little changed at 9.2717 EURSEK= to the euro, having pulled away from a near four-month high of 9.053 struck earlier this month.

Asia and Europe have little to offer in terms of market-moving economic data on Tuesday, leaving the focus on U.S. durable goods data due later in the day. ECONUS

(Editing by David Gregorio & Shri Navaratnam)

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