Euro on pace for worst week in 16 months on ECB speculation

NEW YORK Fri Nov 1, 2013 3:59pm EDT

U.S. one-hundred dollar bills are seen in this photo illustration at a bank in Seoul August 2, 2013. REUTERS/Kim Hong-Ji

U.S. one-hundred dollar bills are seen in this photo illustration at a bank in Seoul August 2, 2013.

Credit: Reuters/Kim Hong-Ji

NEW YORK (Reuters) - The euro fell for a fifth day against the dollar on Friday, heading for its biggest weekly loss in 16 months, on growing expectations the European Central Bank will ease monetary policy further to protect growth.

More losses are likely as traders said the single currency's climb in recent months was overdone. The euro hit a 23-month high above $1.38 last Friday, a gain of more than 8 percent from early July.

Plunging euro zone inflation is raising the specter of deflation in some areas and fueling bets the ECB will be forced to ease monetary policy in coming months. A rate cut would erode the euro's interest rate advantage over other major currencies.

"Speculation that the central bank may cut rates next week has led to the euro bearing the brunt of the greenback's new-found resilience," said Samarjit Shankar, director of market strategy at BNY Mellon in Boston.

The euro fell as low as $1.3478, according to Reuters data, its lowest since October 16. It was last down 0.7 percent at $1.3488 after having fallen 1.1 percent on Thursday, its biggest one-day drop in more than six months.

Near-term support lies around $1.3480 heading into the ECB meeting. Below that level, some traders said the euro could potentially fall towards $1.3250 or even $1.30.

The euro at current levels is poised to end the week 2.3 percent lower, the largest weekly loss since early July.

The ECB meets next Thursday. Money markets, which were already pricing in the possibility of looser ECB policy in the coming year, now reflect an outside chance of a move in the next few months.

Vassili Serebriakov, foreign exchange strategist at BNP Paribas in New York, said while his firm is not expecting an ECB rate cut at its November meeting, it is forecasting one at the December meeting. BNP sees the euro at $1.32 at year end.

The euro's losing streak against the greenback marked its longest stretch in two months. It also fell 0.3 percent to 133.19 yen but gained 0.1 percent versus sterling, which came under pressure after disappointing UK manufacturing data.

The dollar rose 0.4 percent to 98.76 yen and was on track for a weekly gain of 1.4 percent, the best weekly performance since mid-July.

The dollar index, which measures the greenback against a basket of six major currencies, rose 0.7 percent to its highest since mid-September at 80.729 .DXY, far above a nine-month trough of 78.998 plumbed a week earlier.

The dollar rallied after the Federal Open Market Committee, the Federal Reserve's policy-making arm, on Wednesday dropped a phrase from its September meeting that noted tight financial conditions.

Investors should expect more dollar buying and euro selling, said Richard Cochinos, G10 strategist at CitiFX, a division of Citigroup in New York.

"As the growth story in Europe changes, the equity flow investment that has been supporting euro/dollar should fall," Cochinos said. "When you look at equity positions, they are just beginning the rebalancing."

Adding to dollar strength was data showing U.S. manufacturing sector expanded at its fastest pace in years in October despite a partial government shutdown during the first half of the month.

St. Louis Federal Reserve Bank President James Bullard said on Friday the Fed should wait for signs that U.S. inflation is heading higher before starting to scale back its massive bond-buying program.

(Additional reporting by Julie Haviv; Editing by Nick Zieminski)

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Comments (2)
Willvp wrote:
Those reporters and specialist economist “see” rate cuts, hear “dropping of phrases”, yadda-yadda-yadda, billions are scraped in by their masters. What a nice world we have become. Can they also “see” a happy end to this?

Nov 01, 2013 1:03pm EDT  --  Report as abuse
dareconomics wrote:
The table above illustrates the relative advantage or disadvantage of the country’s euro membership, and it is all you need to know in order to correctly predict the ECB’s next move. Germany is essentially running the ECB, so the bank delivers the monetary policy that the Germans want. As long as inflation remains low and the value of the euro is weak enough for Germany to maintain its export subsidy, then Draghi will hold the course steady. If the euro begins to rise above $1.45, Germany will allow a rate cut to weaken the euro.

An expensive euro is not as unlikely as you think. Eurozone banks are busy selling assets to raise their capital levels before the ECB stress tests. As long as this process continues, their will be steady buying pressure on the euro. In the meantime, the ECB is not matching the rest of the world’s central bank printing programs. As such, the euro will continue to strengthen:

Full post with charts, images and links:

Nov 01, 2013 1:45pm EDT  --  Report as abuse
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