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Euro Declines to 14-Month Low After ECB Cuts Rates as Dollar Climbs on US Outlook

Thursday, 04 Sep 2014 08:54 AM


The euro dropped below $1.30 for the first time since July 2013 after the European Central Bank unexpectedly cut its main refinancing rate to a record 0.05 percent and introduced additional stimulus.

The shared currency fell against 31 major peers after ECB President Mario Draghi said the central bank will buy “a broad portfolio” of asset-backed securities starting next month.

A dollar gauge gained as a report showed U.S. service industries climbed in August, bolstering chances for the Federal Reserve to raise interest rates. The yen approached the weakest since 2008 after the Bank of Japan kept its record stimulus unchanged.

“The ECB went a little bit ahead of what the market had expected,” Mark McCormick, a foreign-exchange strategist at Credit Agricole SA in New York, said in a phone interview.

“The risks are that we do have a short squeeze in the euro given how much market positioning has moved ahead of the ECB. We’re setting ourselves up for a sustainable downtrend in the euro come 2015.” A short squeeze is when traders are forced to buy back a currency after they sold it in a bet it would fall.

The euro dropped 1.5 percent to $1.2952 at 1:33 p.m. New York time and reached $1.2920, the lowest since July 10, 2013. It fell 1.1 percent to 136.30 yen. Japan’s currency declined 0.4 percent to 105.24 per dollar and touched 105.37. It depreciated to 105.44 on Jan. 2, the weakest since October 2008.

Franc Cap

The Swiss National Bank could find itself defending its currency cap again via interventions in response to the ECB actions. The franc, on which the SNB has an upper limit of 1.20 per euro, touched its strongest since November 2012, 1.20449 per euro, before trading at 1.20634. The Zurich-based central bank says it hasn’t intervened to defend the minimum exchange rate in two years.

“It’s clear that the SNB will intervene again if the franc gets to 1.20,” said Maxime Botteron, a Credit Suisse Group AG economist in Zurich. “But there’s no reason to ease policy further and take supplementary measures for the time being.”

The ECB’s decision to lower the refinancing rate by 10 basis points, or 0.1 percentage point, was forecast by just six of 57 economists surveyed by Bloomberg News. The remainder predicted the central bank would leave it unchanged at 0.15 percent. The bank cut the deposit rate to minus 0.2 percent.

The ECB will start buying securitized debt and covered bonds, Draghi said. Details are to be announced in October. A bond-buying program, or quantitative easing, was also discussed, he said.

‘By Surprise’

“The rate cuts have clearly taken the market by surprise, judging by the immediate euro reaction,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London. “It’s clear the ECB wants a weaker euro and they are prepared to do what is necessary to get it.”

Kinsella said Commerzbank forecasts the euro will fall to $1.25 by end of March 2015.
The euro has dropped 2.1 percent in the past month, the worst performer in the Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar gained 1.9 percent, while the yen dropped 1 percent.

“Draghi has strengthened his dovish rhetoric with action,” said Salman Ahmed, a global strategist at Lombard Odier Investment Managers in London. There were “expectations that movement would be made on the ABS program, but this goes a step further. What the ECB did today strengthens their credibility. We expect sustained euro weakness.”

The yen weakened versus the dollar after central bank Governor Haruhiko Kuroda said a stronger greenback wasn’t particularly negative for the Japan.

The Bank of Japan kept its record stimulus unchanged at the conclusion of a two-day meeting, maintaining its pledge to increase the monetary base at an annual pace of 60 trillion yen ($570 billion) to 70 trillion yen.

U.S. Economy

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 developed-market peers, reached 1,039.54, the highest since July 15, 2013.

U.S. service providers expanded at the fastest pace since August 2005. The Institute for Supply Management’s non- manufacturing index climbed to 59.6, from 58.7 a month earlier, the Tempe, Arizona-based group said today. Readings greater than 50 signal expansion.

Other data showed claims for jobless benefits in the U.S. were little changed last week. U.S. companies added 204,000 jobs in August, a report from the ADP Research Institute showed, fewer than the 220,000 estimated in a Bloomberg survey of economists.

Nonfarm Payrolls

U.S. nonfarm payrolls increased by 230,000 jobs last month, economists in another survey forecast before the Labor Department reports the data tomorrow. It would be the seventh straight month of gains of more than 200,000.

Canada’s dollar rallied 1.7 percent against the euro, the most of its 16 major peers. The pound gained 0.9 percent.

Sterling fell to its lowest level versus the dollar since February, weakening as much as 0.7 percent to $1.6344, as the Bank of England kept its policy rate unchanged.

“With U.S. data continuing to surprise on the upside this week, the combination is very powerfully negative for euro- dollar,” Daniel Katzive, a director and head of foreign- exchange strategy, North America, in New York at BNP Paribas SA, said in a phone interview. “We think the euro has a lot further to fall versus a lot of the crosses, including sterling and Canada.”

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The euro dropped to the lowest level versus the dollar since July 2013 after the European Central Bank unexpectedly cut its main refinancing rate to a record 0.05 percent.Just six of 57 economists surveyed by Bloomberg correctly forecast the 10-basis point reduction of the...
ecb, euro, european central bank, currency
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2014-54-04
Thursday, 04 Sep 2014 08:54 AM
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