Euro subdued, capped by eurozone risks

The euro eased on Monday, taking a breather after last week’s rally, with investors wary before the release of an influential survey on German business sentiment and a slew eurozone events in coming weeks.

While the euro could find support before U.S. Federal Reserve Chairman Ben Bernanke’s speech at an annual symposium in Jackson Hole, Wyoming on Friday, it may struggle to break above a recent seven-week high in the near term, analysts said.

Volumes were thin with London shut for a holiday.

The focus was on Germany’s Ifo index, the country’s most influential indicator of economic health. Forecasts are for the business climate index to drop in August and a worse than expected reading could see the euro come under some pressure, analysts said.

“A larger than expected fall might create concerns about the economic situation in Europe,» said Lutz Karpowitz, currency strategist at Commerzbank.

“If Germany also begins to run out of steam that would put further pressure on the European finances. As a result, a disappointing Ifo might put pressure on the euro today.”

The euro eased marginally to $1.2505 staying below a peak of $1.2590 set last Thursday on trading platform EBS, its highest since July 4. Traders cited bids at around $1.2445/50 while offers were reported above $1.2530.

A speech later on Monday by German ECB Executive Board member Joerg Asmussen, who said last week a Greek exit from the eurozone was manageable but not preferable, will also be closely watched for the central bank’s latest thinking on the crisis, analysts said.

Last week’s rise in the euro was a result of traders trimming bets against the currency. Expectations the European Central Bank will take action next month to bring down Spanish and Italian bond yields have helped bolster the euro.

It also gained ground versus the dollar after the minutes of the Fed’s most recent policy meeting reignited speculation the central bank could introduce more monetary stimulus.

But the euro is likely to struggle to make substantial gains given a number of events that could derail it in the near term.

The ECB’s next policy is meeting on September 6 and a German Constitutional Court rules on the eurozone’s permanent bailout fund on September 12. Analysts are also focusing on whether international lenders will agree to give Greece additional time to meet its budget targets.

Underscoring the uncertainty over a quick solution to the festering debt crisis, Germany’s Bundesbank has likened the ECB’s bond-buying plans to a dangerous drug and a conservative ally of the German leader said Greece should leave the currency bloc by next year.

“There’s a lot of event risk, and I think this event risk will keep the euro capped,» said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong. He predicted the euro «will struggle to get above $1.26 this week».

The dollar index, which measures the dollar’s value against a basket of currencies, last stood at 81.599 .DXY. It hit a two-month low of 81.221 hit last week.

The dollar inched up 0.1 percent to around 78.74 yen.

The Australian dollar skidded to a one-month low of $1.0372 and looked vulnerable to further losses on concern about China’s economic health. The growth-linked currency is often used to express views on the world’s second largest economy.

China’s industrial sector posted a sharp profit drop in July, a fresh sign of slackening domestic and external demand.