FOREX-Euro slumps on ECB negative deposit rate talk

Thu May 2, 2013 12:42pm EDT

Related Topics

* Euro falls sharply after Draghi's comments on deposit rates

* ECB cuts benchmark rates as expected, says policy to remain accommodative

* April U.S. nonfarm payrolls due Friday; 145,000 job growth expected

By Wanfeng Zhou

NEW YORK, May 2 (Reuters) - The euro fell for the first time in five sessions against the dollar on Thursday after European Central Bank President Mario Draghi said the bank is technically ready for negative deposit rates and noted downside risks to the economy.

Draghi's comments came after the ECB cut its benchmark refinancing rate by 25 basis points to a record low 0.5 percent, its first cut in 10 months, and left the deposit rate unchanged.

While there are "several unintended consequences that may stem from a negative deposit rate, Draghi said policymakers will look at this with "an open mind" and "stand ready to act if needed."

A negative deposit rate would mean having to pay for holding euro deposits. Such a move could drive money out of the euro zone into other higher-yielding assets and encourage the banks to lend out money rather than hold it at the ECB.

"The fact that Draghi is leaving the door open for the prospects of negative deposit rates is a medium- to long-term euro negative," said Paresh Upadhyaya, director of currency at Pioneer Investments in Boston.

"It certainly opens the door for capital outflows, and that's what makes it essentially a game changer in terms of the euro."

The euro fell 0.9 percent to $1.3061, after briefly dropping more than 1 percent to a session low of $1.3036, according to Reuters data.

Ashraf Laidi, chief global strategist at City Index Ltd in London, said the euro could see further declines towards the $1.2920-30 area. But he added the euro/dollar could consoliate in the $1.2850 to $1.3200 range as expectations of the Fed tapering its asset purchases faded.

Investors' focus now shifts to Friday's U.S. non-farm payrolls report for April. Economists polled by Reuters are looking for job growth of 145,000 last month, up from 88,000 for March. The unemployment rate is seen holding steady at 7.6 percent.

If the jobs data adds to recent signs of a softening in the U.S. economy, it would intensify speculation that the Federal Reserve's next move is more likely to be to increase debt purchases, which would pressure the dollar.

The Fed said on Wednesday it will continue buying $85 billion in bonds each month to keep interest rates low and spur growth. The Fed added it would step up purchases if needed to protect the economy.

LESS THAN SUBTLE INTERVENTION

Alan Ruskin, head of G10 FX strategy at Deutsche Bank in New York, said Draghi's comments on negative deposit rates are "a less than subtle form of FX verbal intervention."

"Draghi knew exactly what he was doing and it is very likely that keeping the door open on negative deposit rates, was more than a way of saying we are keeping all our policy options open, and was one of the few ways Draghi could significantly impact the euro," Ruskin wrote to clients.

Trading was choppy, with the euro earlier rising to a session peak of $1.3215 after Draghi said the central bank's monetary policy will remain accommodative for as long as needed. Some analysts said the comments boosted hopes further stimulus will help the euro zone's economy to recover.

But the gains faded as Draghi also noted "downside risks" to growth.

Surveys on Thursday revealed a deepening contraction in euro zone manufacturing in April. Of particular concern, factory activity in Germany, Europe's largest economy, fell for the second month and at a faster pace than in March.

Against the yen, the euro fell 0.3 percent to 127.98 yen .

The dollar rose 0.6 percent to 97.99 yen, having earlier risen 1 percent after data showed the number of Americans filing new claims for jobless benefits fell sharply last week to a five-year low while the U.S. trade gap narrowed in March.

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California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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