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Fed Speculation Lifts the Euro and With It, Risk

The euro, after several crushing days, is getting a lift from speculation the Fed may announce more easing in its midday statement.

Euro bills
Euro bills

However, many Fed watchers think while it may be dovish in tone, the Fed is unlikely to announce another so called "quantitative easing" at 12:30 p.m.

There is speculation, however, that the Fed is preparing the markets for the potential of a "QE3" program that will focus on mortgage securities purchases.

The sentiment also helped lift stocks and other risk assets, like oil and metals. The Dow was up more than 1.8 percent in late Wednesday morning trading.

"The euro is being supported by the Fed...I think that's the headline," said Boris Schlossberg of GFT Forex. "If they do suggest QE3 is possible, that's going to be extremely dollar negative. I think basically the Fed's position is this: 'We're the only source of stimulation in the U.S. economy. We cannot abandon our duty to keep the economy going."

The Fed releases its statement at 12:30 p.m., and its economic forecast at 2 p.m. Fed Chairman Ben Bernanke then holds a 2:15 p.m. press briefing.

The euro, at 1.381, was up about 0.8 percent Wednesday morning, after a more than 3 percent decline this week against the dollar.

Mark McCormick, currency strategist at Brown Brothers Harriman, said the euro may also be pushed higher by speculation about the European Central Bank , which meets tomorrow. He said it is unlikely the ECB will cut interest rates at the first meeting conducted by new ECB President Mario Draghi, but it could suggest a rate cut is coming soon.

"We don't believe the Fed is going to go forward with QE3. They're going to open up their communications to maybe lead into what they're next move is.. You also have the G-20 summit, which could be supportive of risk appetite. Also, you have the ECB meeting, which I think would clear the way for Draghi to cut rates in the future," McCormick said. Some expect the first interest rate cut to come in December.

Rate cuts could normally be bearish for currency but not so for the euro, perhaps. "I think the signal of a rate cut might be a positive because of the economic problems in the euro zone," said McCormick.

The euro has been rattled mostly by Greece this week, and Prime Minister George Papandreou's vow to have Greek citizens vote in a referendum on the country's commitment to the bailout plan.

Speculation went both ways about Papandreou, who faces a confidence vote Friday in Parliament. That vote will be very close and could throw the Greek government in disarray, resulting in new elections.

European leaders meet today ahead of Thursday's G-20 summit, where they had been expected to present their bailout plans. They are expected to meet with Papandreou, who shocked other European leaders with the referendum.

"The market is not totally depressed by the idea of a referendum because it has not yet been given a green light," said Schlossberg.

Follow Patti Domm on Twitter: @pattidomm

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