Euro stays on edge as crucial ECB meeting looms

The euro flirted with 11-year lows on Monday as investors braced for the European Central Bank to take its boldest steps yet to combat deflation and revive the euro zone economy.

The common currency last traded at $1.1557, not far from a trough of $1.14595 hit on Friday. Against the yen, it fetched 135.17, near a three-month low of 134.70.

That the ECB will launch a large-scale sovereign bond-buying program at its Jan. 22 meeting is no longer in question, but what is unknown is how the plan will be designed and whether it will be seen as credible and sufficient.

“There will no doubt be a lot of wire traffic after Thursday’s meeting about these details and such structural shortcomings, but the total QE to be announced will get prime attention,» said David de Garis, senior economist at National Australia Bank, adding the market was now looking for quantitative easing of 1 trillion euros.

The euro struggled near a four-month low against the Australian dollar and a record low against the New Zealand currency.

Against the Canadian dollar, the euro remained within near a 16-month low of C$1.3749 set on Friday.

Pressure on the euro intensified last week after the Swiss National Bank shocked markets by abandoning its three-year-old currency cap, effectively removing a pillar of support for the euro.

The SNB had been buying billions of euros in order to keep the franc from strengthening above the 1.20 per euro cap it had implemented back in September 2011.

The abrupt policy U-turn sparked speculation that the SNB was forced to do so ahead of bold moves from the ECB. The Swiss franc rocketed across the board, although it seemed to have stabilized around 0.9997 francs per euro.

Further stirring expectations that the ECB was poised to act, media reports suggested ECB President Mario Draghi met with German Chancellor Angela Merkel last week to smooth the path for quantitative easing, which is staunchly opposed by the Bundesbank.

Whatever the outcome, traders said there is sure to be plenty of volatility at the end of this week, with Greece due to hold a snap election that add to concerns over the euro.

The radical leftist Syriza party has held a consistent lead in the polls and is intent on ending austerity and seeking debt renegotiation with its European partners, though it insists it wants to stay in the euro zone.

Caution ahead of these key events as well as the aftershocks from the Swiss move last week made many investors wary of risk.

That supported the yen, with the dollar easing to as low as 116.925 against the yen on Monday.

“Markets are still digesting the SNB shock and trying to assess its what damage it has done. We are yet to see the full impact,» said Kosuke Hanao, head of FX at HSBC in Tokyo.

“Some hedge funds, which were severely battered by the SNB’s surprise move, are likely to have sold assets like dollar against the yen to lock in profits and generate cash.”

Damages from the Swiss franc’s sharp moves could take a few months to heal, said Daisaku Ueno, chief foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities, noting market players do not know the exact scale of losses.

But for now, with the U.S. markets shut on Monday for a public holiday and little in the way of market-moving economic data, currency markets could be in for a relatively slow session.

On Tuesday, investors will get an update on China’s fourth-quarter growth numbers.

Market players are also watching out for whatever Bank of Japan Governor Haruhiko Kuroda says after a two-day policy meeting starting on Tuesday. Plunging oil prices have made it almost impossible for the BOJ to achieve its inflation target of 2 percent in the fiscal year from April.