LONDON - The euro stayed on the back foot on Monday, having dropped to a five-day low against the dollar overnight, as investors remained convinced the European Central Bank will introduce a new wave of monetary stimulus at its meeting on Thursday.
Leveraged funds have increased their net short positions on the euro, expecting the ECB to cut interest rates, announce it will buy government bonds or other European assets, or both.
Other global central banks are already loosening monetary policy, including the People's Bank of China which on Friday cut the amount of cash that banks must hold as reserves.
"ECB watchers are confident there could be a 20 bps cut and so the potential surprise (for the euro) on the rate cut isn’t that big," said Esther Maria Reichelt, a Commerzbank analyst.
"It's far more difficult to assess what kind of unconventional measures" the ECB could use to stimulate the euro zone economy, which "could have a far bigger impact on the euro," Reichelt said.
Money markets are pricing in a 72% chance the ECB will cut rates by 20 basis points on Thursday, a slightly lower level of certainty than last week. Some analysts suggest the ECB will start buying euro zone equities, not just government bonds, in a new wave of quantitative easing.
By 1040 GMT, the euro was steady against the dollar at $1.10335. It slipped to $1.10155 overnight, its weakest since Sept. 4.
Hedge funds have added more short euro positions, taking the amount of contracts to $6.74 billion in the week to Sept. 3, the highest in a month, though positions were not as big as in April.
"The default is to be negative euro into ECB," said Kenneth Broux, head of corporate research at Societe Generale.
"Resuming bond purchases won't do anything" to the euro zone economy because "the monetary policy in Europe has stopped being effective," Broux said. "The ECB has done all it can."
The dollar index, which tracks the U.S. currency against six other currencies, was flat at 98.33. The dollar was also confined to a narrow range against the yen as traders weighed the prospect of U.S. rate cuts against their demand for safe-haven assets. Dollar/yen was last up 0.1% at 107.02.
The Federal Reserve will continue to act "as appropriate" to sustain the U.S. economic expansion, Fed Chair Jerome Powell said Friday in Zurich, bolstering expectations for a rate cut at the Fed's meeting on Sept. 18.
Elsewhere, sterling turned positive to reach a six-week high of $1.2385 after better-than-expected British economic data and because some banks have revised down their no-deal Brexit expectations.
Traders waited to see whether the British parliament would vote to hold an early general election before the Oct. 31 Brexit deadline. If a snap election were held and the Conservative Party won, it could scrap recent legislation to extend Britain's exit from the European Union for a third time.
Against the euro, sterling was up 0.6% at 89.17, having hit earlier a six-week high of 90.13.
(Reporting by Olga Cotaga; Editing by Toby Chopra)
