Euro Falls Most Since January With ECB Forecast to Reduce Rates

May 31, 2014

Frankfurt (May 31)  The euro fell the most since January on speculation the European Central Bank will add stimulus next week to ward off deflation and bolster economic growth. The 18-nation currency reached a more than three-month low as ECB President Mario Draghi said earlier this month that the euro’s strength is cause for “serious concern.” The yen advanced versus the dollar for a second month as a government report showed inflation accelerated to the fastest in more than two decades in April, reducing the prospect of additional stimulus by the Bank of Japan. The ECB is forecast to cut its deposit and main refinancing rates when it meets June 5.

“It’s had something of a depressing effect globally to a degree and is consistent obviously with the euro looking a little weaker,” Alan Ruskin, the global head of Group of 10 foreign exchange at Deutsche Bank AG in New York, said of the ECB’s upcoming meeting and government-bond yields. “The issue is trying to discern what’s priced in. That’s not easily done because, when you get to unorthodox policies, it’s less obvious.”

The euro fell 1.7 percent this month to $1.3635 in New York and reached $1.3586 on May 29, the lowest level since Feb. 13. The currency dropped 2.1 percent to 138.74 yen, the most since January. The yen added 0.5 percent to 101.77 per dollar.

Winners, Losers

Chile’s peso and the Russian ruble led gains among 31 major currencies this month, advancing 2.7 percent and 2.2 percent respectively, according to data compiled by Bloomberg. Sweden’s krona dropped 2.8 percent as its economy shrank while the Czech koruna slumped 1.8 percent, the biggest losers.

Hedge-fund managers and other large speculators added to bets the euro will weaken against the dollar to the most since July. The difference in the number of wagers on a decline in the common currency, compared with those on a rise -- so-called net shorts -- was 16,633 on May 27, compared with 9,220 a week earlier, according to data from the Commodity Futures Trading Commission.

The euro, which added 4.2 percent against the greenback last year, is hurting the central bank’s effort to boost consumer prices. Inflation remains below the ECB’s target of just under 2 percent.

ECB policy makers will likely cut the main refinancing rate, according to all except two of 56 analysts surveyed by Bloomberg. Most predict a reduction to 0.1 percent from 0.25 percent. The central bank is also likely to lower its deposit rate into negative territory for the first time, the poll showed.

ECB Policy

The central bank is working on a package of measures to fuel price growth and stimulate the economy, Executive Board member Yves Mersch said this week.

Axel Merk, president and founder of Palo Alto, California-based Merk Investments LLC, said the ECB may struggle to damp euro strength.

“The dilemma that Draghi has is that it’s extremely hard to debase the euro,” Merk said yesterday in a telephone interview. “The market is positioned and very much sold on the euro. Draghi isn’t going to be able to deliver, and so we’ve been buying the euro.”

Central-bank policies are helping depress foreign-exchange volatility, which slowed to the lowest level in almost seven years, according to a JPMorgan Chase & Co. index for the currencies of the Group of Seven nations. The gauge fell to 5.92 percent yesterday, the lowest since June 2007.

Price Swings

“The forward-guidance policy by the central banks is keeping a lid on rate expectations,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. “We’re increasingly going to see very flat volatility. It doesn’t seem at present that there’s going to be any catalyst to shake us from the malaise.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, rose 0.3 percent in May, the most since January, to 1,010.78.

Initial jobless claims fell more than projected last week while business activity in the Chicago area unexpectedly increased to a seven-month high. U.S. employers added 215,000 jobs in May, compared with a 288,000 gain in April, according to a Bloomberg News survey of economists before the June 6 report.

“We have some encouraging leading economic data for the second quarter, which looks like the economy is recovering nicely,” Michael Woolfolk, a global-markets strategist at Bank of New York Mellon in New York said yesterday.

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