Euro Retreats From Eight-Month High Before ECB Meets; Kiwi Drops

The euro retreated from an eight-month high versus the dollar before the European Central Bank meets today for the first time since President Mario Draghi said he’s ready to inject cash into the banking system.

The greenback rose against most major peers before a private report forecast to show companies in the U.S. added jobs at a faster pace. U.S. lawmakers still need to agree on raising the debt limit to avoid a default after Oct. 17, following the government’s first partial shutdown in 17 years. Demand for the euro was also damped before Italian Prime Minister Enrico Letta faces a confidence vote today. New Zealand’s dollar dropped against all its major counterparts.

“In recent speeches, some ECB board members were concerned about the low level of excess liquidity,” said Joseph Capurso, a Sydney-based currency strategist at Commonwealth Bank of Australia (CBA), the nation’s biggest lender. Indications of another long-term refinancing operation “would be seen as putting downward pressure on European market interest rates and would put downward pressure on the euro.”

The 17-nation shared currency was little changed at $1.3518 at 7:59 a.m. London time after reaching $1.3588 yesterday, the highest since Feb. 6. It weakened 0.5 percent to 131.90 yen. The dollar fell 0.4 percent to 97.57 yen.

“We are ready to use any instrument, including another LTRO if needed, to maintain the short-term money markets at the level that is warranted by our assessment of inflation in the medium term,” Draghi said in response to questions from lawmakers in the European Parliament in Brussels on Sept. 23.

ECB Meeting

ECB policy makers meeting in Paris will keep the benchmark refinancing rate unchanged at a record low of 0.5 percent, according to all 52 economists in a Bloomberg News survey. Draghi will hold a news conference after the decision.

The ECB president will hold off from pumping more cash into the region’s financial system as long as the threat of action keeps market interest rates under control, according to economists from Berenberg Bank to Nomura International Plc.

“Recent comments from ECB President Draghi and other policy makers suggest they are still cautious on the recovery, while the tightening in money market conditions remains an on-going concern,” BNP Paribas SA currency strategists Vassili Serebriakov and Daniel Katzive in New York wrote in a note to clients. “A new factor for the ECB to consider is the exchange rate, which has strengthened since the last meeting.”

The central bank issued more than 1 trillion euros in three-year loans in 2011 and 2012, giving banks an option to repay them early. As banks take up that option, excess liquidity in the system is approaching the 200 billion-euro level that Draghi has signaled as a lower limit.

Italian Vote

Demand for the euro was limited as the survival of Italian Prime Minister Letta’s government will be tested in a confidence vote today, after former premier Silvio Berlusconi’s decision last week to withdraw support. Berlusconi’s People of Liberty party has splintered, with Angelino Alfano, who stepped down as deputy premier at Berlusconi’s request, saying yesterday his party will back the government.

“Even if the government survives, which looks more likely following yesterday’s news and rumors, political uncertainty would remain,” Frederik Ducrozet, an economist at Credit Agricole CIB in Paris, wrote in research dated today. That will “limit the upside” for market sentiment, the note said.

In the U.S., companies added 180,000 to their payrolls in September, according to the median estimate of economists surveyed by Bloomberg before today’s report from the ADP Research Institute. Firms hired 176,000 workers in August, according to ADP.

Data Delays

The U.S. Labor department won’t release its monthly jobs report on Oct. 4 if the federal government remains closed, according to the Bureau of Labor Statistics. The BLS “will not collect data, issue reports, or respond to public inquiries” during the shutdown, it said on its website. “Revised schedules will be issued as they become available” once the government resumes operations, it said.

Treasury Secretary Jacob J. Lew urged Congress to extend the nation’s borrowing authority “immediately,” in a letter addressed to House Speaker John Boehner dated yesterday. Lew said the U.S. has begun using the final extraordinary measures to avoid breaching the debt limit, and repeated that they will be exhausted no later than Oct. 17.

Debt ‘Reckoning’

The shutdown began after House and Senate lawmakers failed to agree on a spending plan for the new fiscal year that started yesterday. Chances of a last-minute deal evaporated as the Republican-controlled House stood firm on its call to delay major parts of President Barack Obama’s health-care law for a year. Senate Democrats were equally firm in refusing.

“You’re not too far from the point that you start thinking about the day of reckoning with the debt ceiling, and we’re also starting to go into a black hole period in terms of U.S. data,” said Robert Rennie, the Sydney-based chief currency strategist at Westpac Banking Corp. “There’s the potential for a scramble for U.S. dollars.”

The greenback tends to appreciate in times of financial stress because of its status as the world’s reserve currency. Obama has said that relationship must not be put at risk.

New Zealand’s dollar weakened for a second day after a central bank official said the nation’s neutral interest rate has fallen. The neutral 90-day rate is about 4.5 percent and rates will approach that level in early 2016, John McDermott, the assistant governor and head of economics, said according to the bank’s website. It was 5.5 percent to 6.5 percent in previous cycles, he said.

The kiwi dollar slid 0.8 percent to 82.14 U.S. cents after reaching 81.94, the lowest since Sept. 17. It declined 0.3 percent yesterday.

To contact the reporters on this story: Kevin Buckland in Tokyo at kbuckland1@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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