Euro remains subdued before key ECB meeting this week

The euro fell to a five-day low against the dollar Monday as investors remained convinced the European Central Bank would introduce a new wave of monetary policy 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 percent chance the ECB will cut rates by 20 basis points on Thursday, lower expectations 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.

The euro was neutral against the dollar in early London trade at $1.1033. 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.