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Weak Euro Continues on Downward Trajectory

The single currency headed for a third weekly loss after Mario Draghi said neither tapering nor an extension of bond-buying stimulus was discussed at a monetary meeting
Weak Euro Continues  on Downward TrajectoryWeak Euro Continues  on Downward Trajectory

The euro fell to its lowest level since March after Mario Draghi signaled Thursday quantitative easing won’t come to an “abrupt” end, leaving traders waiting until at least December for news about policy changes.

The European Central Bank kicked back a decision on whether to boost its €1.7 trillion ($1.86 trillion) stimulus, disappointing investors who had hoped for greater clarity from Frankfurt and raising the stakes for its next policy meeting in December, news outlets reported.

At a short news conference, ECB President Mario Draghi said policy makers hadn’t even discussed whether to extend the central bank’s €80 billion-a-month bond-purchase program, which is due to end in five months.

The single currency headed for a third weekly loss after Draghi said neither tapering nor an extension of bond-buying stimulus was discussed at a monetary meeting. It has slipped 2.9% this month, after trading in its tightest quarterly range against the greenback on record in the three months through September. The euro may drop another 0.7%, according to Matt Simpson, a senior market analyst at ThinkMarkets in Singapore.

“It’s a double-whammy from the ECB meeting,” Simpson said. “Draghi didn’t talk tapering and suggested easing in December. That’s got traders pricing in a weaker euro.”

The euro dropped 0.2% to $1.090 in London, after falling to as low as $1.089, the weakest level since March 10. It has fallen 0.6% this week. Simpson predicts it will weaken toward $1.083.

Europe’s unprecedented QE plan was designed to spur inflation and economic growth. Stimulative monetary policy tends to weaken a currency, potentially benefiting a sluggish economy by making exports cheaper and boosting consumer prices. Draghi said on Thursday that an abrupt end to QE was unlikely. The ECB left interest rates and its bond-buying plan unchanged, as predicted by economists in a Bloomberg survey.

Investor Nervousness

As that deadline approaches, investors have been growing nervous. Financial markets were rattled earlier this month by a media report suggesting that the ECB might start to wind down, or taper, its bond purchases—the opposite of what most economists had been expecting.

Draghi brushed off that report on Thursday as “uninformed,” and strongly suggested the ECB would announce an extension of its so-called quantitative-easing program at a policy meeting Dec. 8.

“It’s quite clear that our decisions in December will tell (financial markets) what we (plan to) do in the coming months,” Draghi said.

Still, some investors were disappointed by the lack of clearer guidance from Frankfurt.

“An already nervous market will not take much comfort from Draghi’s obfuscation today,” said James Athey, a fixed-income manager at Aberdeen Asset Management PLC in London.

The sharp movements show how dependent financial markets have become on the actions of central banks, which have taken unprecedented action in recent years to support weak growth and inflation.

The ECB’s balance sheet has swelled to almost €3.5 trillion, a record high, as it launched and repeatedly expanded its stimulus. Its policy measures include large-scale bond purchases, negative interest rates and cheap loans for banks.

Despite that aggressive action, eurozone inflation has continued to hover close to zero, far below the ECB’s target of just under 2%.

Dollar Factor

“Arguably the market’s concerns about tapering from next April or an abrupt end to QE have eased a little post-ECB,” said Ray Attrill, global co-head of foreign-exchange strategy at National Australia Bank Ltd. in Sydney. “But we also have a slightly firmer dollar on our hands, and I suspect the drop in the euro-dollar rate is as much to do with that as anything else.”

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, added 0.1%. Futures traders are pricing about a 68% probability that the US central bank will lift interest rates by December, up from 66% at the end of last week. The greenback measure has declined 0.1% since Oct. 14, halting a two-week advance.

 

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