FOREX-Euro slumps on ECB negative deposit rate talk

Thu May 2, 2013 5:06pm 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
    * Canada, in surprise move, names Stephen Poloz next BOC
governor

    By Wanfeng Zhou and Daniel Bases
    NEW YORK, May 2 (Reuters) - The euro fell against the dollar
for the first time in five sessions 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 banks would have to pay
the ECB 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
central bank.
    "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 0.87 percent to $1.3062, 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 face further declines toward the
$1.2920-30 area. But he added that the euro/dollar could
consolidate in the $1.2850 to $1.3200 range as expectations of
the Federal Reserve 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 Fed'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 that 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 rising to an early
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 0.26 percent to 128.01 yen
.
    The dollar rose 0.62 percent to 97.98 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. 
    In late New York trade, the Canadian dollar fell to its
weakest point in two days after the government named Stephen
Poloz, in a surprise move, as its next governor of the Bank of
Canada. The greenback rose to C$1.0111, a gain of 0.25 percent
on the day. 
     Poloz, the head of Canada's export credit agency, will
replace Mark Carney, who leaves in June and takes up the
governorship of the Bank of England on July 1.
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