Euro Drops on Speculation ECB May Buy Corporate Debt

Frankfurt (Oct 21)  The euro declined against the dollar after Reuters reported the European Central Bank is looking to buy corporate bonds on the secondary markets, damping demand for the shared currency.

The euro weakened versus 13 of its 16 major peers even as a spokesman for the central bank told Reuters “the Governing Council has taken no such decision.” The dollar halted a three-day gain versus the yen as traders pushed back estimates for when the Federal Reserve will increase U.S. interest rates. The Australian dollar strengthened after China’s economic growth expanded more than analysts forecast. South Korea’s won climbed to the strongest level this month.

“There was the story about the ECB about to buy corporate bonds and the ECB denying it,” said Jane Foley, senior foreign-exchange strategist at Rabobank International in London. The euro move is “just a reaction to that story. The longer the euro stays up here, the more the speculation that the ECB are going to have to do something sooner rather than later.”

The euro depreciated 0.3 percent to $1.2757 as of 6:59 a.m. New York time after reaching $1.2886 on Oct. 15, the most since Sept. 23. The common currency weakened 0.4 percent to 136.39 yen. The dollar was little changed at 106.91 yen after strengthening 1 percent during the previous three days.

Reuters reported that the ECB could make a decision on corporate bond purchases as soon as December, citing several unidentified sources familiar with the situation.

ECB Policy

The central bank has already started charging lenders to park cash with it overnight, introduced a program of targeted cheap loans and pledge to expand its balance sheet through purchases of asset-backed securities and covered bonds.

Futures traders trimmed bets the Fed will raise interest rates by October 2015 to a 48 percent chance, from 51 percent at the end of last week. The central bank has kept its benchmark in a range of zero to 0.25 percent since December 2008.

“We need to see these rate-hike expectations brought forward again” for a stronger dollar, said Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen. “There’s not much to inspire the market right now. We need more positive news for dollar bulls to put on new positions.”

The yen rose versus most of its 16 major counterparts as demand for haven assets was boosted after the Nikkei 225 Stock Average (NKY) slid 2 percent.

Best Performer

Japan’s currency has advanced 3.5 percent in the past month, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as signs global growth is cooling underpinned demand for safer assets. The dollar gained 1.3 percent and the euro rose 0.6 percent.

“The weakness in dollar-yen is correlating very closely with the decline in the Nikkei,” said Sean Callow, a currency strategist at Westpac Banking Corp. in Sydney. “A lot of it gets back to the market still being lopsided, the speculative market having been long dollar-yen in an environment where the risks on U.S. data surprises are tilted to the downside,” he said, referring to a bet the dollar will appreciate versus the yen.

The Aussie and kiwi rallied as reports from China allayed some concerns growth in the Asian nation was slowing. China is Australia’s largest trading partner.

China’s gross domestic product grew 7.3 percent in the third quarter from a year earlier, outpacing the 7.2 percent median estimate of economists surveyed by Bloomberg News. Industrial production rose 8 percent in September from a year ago, compared with a 7.5 percent expansion predicted in a separate Bloomberg survey.

‘More Misery’

“If we’d have got a really weak China data number today, especially on the industrial production numbers, it would have added more misery and we probably would have seen the markets snap back a little bit,” said Chris Weston, chief market strategist in Melbourne at IG Australia, a unit of IG Group Holdings Plc. “It’s certainly a relief,” and has supported the Aussie dollar, he said.

Australia’s currency rose 0.2 percent to 88.01 U.S. cents and New Zealand’s gained 0.2 percent to 79.85 cents.

The won strengthened against all of its 16 major peers as waning bets for Fed interest-rate increases sapped demand for the U.S. currency.

“Factors that led to dollar strength seem to be losing momentum, with expectations getting bigger for a more dovish Fed,” said Jahng Won, a currency trader based in Seoul at Shinhan Bank.

The won gained 0.5 percent to close at 1,054.76 per dollar in Seoul after appreciating to 1,053.05, the strongest level since Sept. 30.

Source:  Bloomberg