The euro hit its lowest in almost three years against the yen while European shares extended their strongest run of the year on Tuesday as data from around the region bolstered the case for more ECB stimulus at its March 10 meeting.
The shared currency dropped to a one-month low against the dollar as consumer prices in the 19-nation bloc declined to minus 0.2% from a positive reading of 0.3% in January. The currency will probably sink to $1.05 per dollar by the end of the quarter before falling to parity with the greenback later in 2016, according to Alan Ruskin, global co-head of foreign-exchange research in New York at Deutsche Bank AG, the world’s second-biggest currency trader, Bloomberg reported.
"We certainly expect a dovish ECB," Ruskin said. "The divergence story isn’t dead," he said, referring to expectations that the ECB will expand stimulus while the US tightens monetary policy. "It does feel a little bit like divergence-lite."
The euro plunged 22% in the past two years on speculation the Federal Reserve would boost borrowing costs as the US economy improved, in contrast to easing by its major peers including the ECB and Bank of Japan. After a pause early this year, the triggers for policy divergence are re-emerging.
The euro declined 1.7% to 122.53 yen in New York, reaching the lowest level since April 2013. It dropped 0.4% against the Swiss franc, touching a two-month low and slid 0.6% to $1.09, reaching the lowest since Jan. 29.
In the futures market, traders see about a 54% chance that the Fed will lift rates by December, assuming the next boost is by a quarter-point. The probability sank below 20% this month.
The shared currency will come under pressure from slowing growth, the regional migrant crisis, potential Brexit, Greek debt negotiations, sovereign-yield divergences and concern about the health of the European banking sector, Ruskin wrote in a note.
Core inflation in the euro region, which strips out volatile elements such as food and energy, was at 0.7%, down from 1% in the prior month. With the latest inflation figures showing the return of price declines, the window of opportunity is closing for the ECB to signal any stimulus intentions for its next meeting before a self-imposed quiet period starts March 3.
"EUR/USD grinding steadily lower is a function of inflation as well as Brexit, with both likely to keep pressure on the currency," Brad Bechtel, a managing director at Jefferies Group LLC in New York, wrote in a note. "The fact that we have had quantitative easing going for a year now and it has not made a dent in inflation is troubling."
