FOREX-Euro slides as poor data raises easing prospects

Thu Feb 14, 2013 2:51pm EST

Related Topics

* Euro zone economy contracted more than expected in 4th
quarter
    * Investors look to G20 meeting for 'currency war' talk
    * G20 FX text may differ from G7, but same intent - Russia

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Feb 14 (Reuters) - The euro dropped to a
three-week low against the dollar and fell sharply versus the
yen on Thursday after data painted a bleak  picture of the euro
zone economy, raising speculation the European Central Bank will
cut interest rates.
    The yen came off recent multi-year lows against the dollar
as investors remained cautious a day ahead of a meeting of Group
of 20 finance officials where exchange rates are expected to be
an important topic. A particular focus would be on the yen's 
recent weakness. 
    The euro fell against the dollar after a report showed the
euro zone's economy shrank by 0.6 percent in the last three
months of 2012, a steeper decline than the 0.4 percent drop
forecast in a Reuters poll. 
    Germany and France, the two largest economies of the
17-nation euro zone, also shrank by more than expected in the
final quarter, casting doubt on forecasts of a recovery in early
2013. 
    "With the growth outlook trimmed, the ECB must show a
willingness to remain flexible with regard to monetary policy to
avoid a deeply entrenched recession that could be devastating,"
said Sean Cotton, vice president and foreign exchange advisor at
Bank of the West in San Ramon, California.
    The euro last traded at $1.3346, down 0.8 percent,
after hitting a three-week low of $1.3313. The euro had hit a
one-week high of $1.3520 on Wednesday and a 15-month high of
$1.3711 on Feb. 1.
    Against the yen, the euro last traded at 124.22 yen
, down 1.2 percent on the day, but above the session
low of 123.79.
    The likelihood of an ECB rate cut this year has grown, said
Joe Manimbo, senior market analyst at Western Union Business
Solutions in Washington. 
    "Negatives have been on the rise in the euro zone ... in
addition to fresh economic jitters, investors are wary ahead of
Italy's national elections set for Feb. 24-25," he said.
    Euro zone banks' next repayment of emergency loans to the
ECB later this month could also weigh on the euro. These banks
are expected to repay a lower amount than they did last month
and cause the ECB's balance sheet shrink at a slower pace.
 
    The euro is up around 1.0 percent against the dollar and
about 8.4 percent against the yen this year, largely a result of
an improved appetite for risk and differing global central bank
policies. 
        
    G20 IN FOCUS
    The Group of Seven nations said this week that fiscal and
monetary policies must be directed at domestic economies and not
at targeting exchange rates.
    But confusion reigned after a G7 official said the statement
was aimed at Tokyo, a comment that prompted the yen to surge on
a volatile foreign exchange market. Other G7 countries later
said it should be taken at face value. 
    Host Russia said the G20 meeting in Moscow would back the
thrust of a Group of Seven statement on currencies, but
indicated there was still haggling over the final wording. 
 
    Frances Hudson, global thematic strategist at Standard Life
Investments in Scotland, said she doesn't expect Japan to be
singled out for its currency policy at the G20 meeting. But if
the G20 does call out Japan, some of the countries within the
group would be on weaker ground.
    "There are countries within the G-20 that actually set
exchange rate targets. And that isn't what Japan is doing,"
Hudson said.
    "Japan is doing what seems to be actions for economic
reasons, such as tackling deflation. Japan didn't come out and
say our objective is a weaker yen. Its objective is to achieve
inflation."
    Against the yen, the dollar, was down 0.4 percent at
93.07 yen, well below a 33-month high of 94.42 hit on Monday,
according to Reuters data. 
    Earlier, the Bank of Japan kept policy steady as expected
and revised up its assessment of the Japanese economy. Some
believe the bank may hold off on expanding stimulus next month
and wait until its first rate review under a new governor,
scheduled for April 3-4. 
    "With Japan seemingly at ground zero of any so-called
currency war, backlash could be headed Tokyo's way at this
weekend's G-20 summit," said Western Union's Manimbo.
    "Although yen selling may be poised for a short-term
reprieve, a bearish trend still appears intact over the medium
term and beyond," he said.
FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.