Euro Falls as Factory Drop Spurs ECB Stimulus View

The euro fell for a second day against the dollar as weaker-than-forecast factory output in the region in December prompted speculation that the European Central Bank may consider further monetary stimulus.

The 18-nation currency slid versus most of its 16 major peers after Reuters reported that ECB Executive Board member Benoit Coeure said the central bank is “very seriously” considering negative deposit rates. The euro area will report gross domestic product figures on Feb. 14. The pound rose the most in eight weeks versus the euro as the Bank of England said the U.K.’s economic recovery is gaining momentum. The dollar fell against the yen before data tomorrow projected to show U.S. retail sales stalled in January.

The manufacturing decline “has people a little bit nervous about the GDP figures due later this week,” Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York, said in a phone interview. “The comment from Coeure was nothing new, but it caught the market off-guard and weakened the euro.”

The euro dropped 0.3 percent to $1.3593 at 5 p.m. New York time, after climbing to $1.3683 yesterday, the highest since Jan. 29. The shared currency lost 0.4 percent to 139.37 yen, the first decline in five days. The dollar fell 0.1 percent to 102.53 yen.

Low Volatility

The JPMorgan G7 Volatility Index fell for a seventh day to 7.72 percent, touching the lowest on a closing basis since Oct. 30. The gauge reached a four-month high of 8.79 on Feb. 3.

South Korea’s won advanced to a three-week high as Federal Reserve Chairman Janet Yellen signaled policy continuity yesterday by pledging the U.S. central bank will reduce stimulus in “measured steps.” The currency appreciated 0.8 percent to 1,062.65 per dollar after climbing to 1,062.16, the strongest since Jan. 20.

The Brazilian real declined versus all 16 of its most-traded peers amid concern that fiscal deterioration will lead to a lower credit rating. The currency slipped 1.1 percent to 2.4260 per dollar, falling to the lowest level in more than a week.

The ECB’s Coeure said the central bank may impose negative deposit rates, “but you should not expect too much of it,” according to a Reuters report. His comment echoes that by policy maker Erkki Liikanen, who said such a policy is one of the tools the central bank could use if the inflation outlook worsens or volatility in money markets “propagates to long term.”

Sluggish Economy

The European statistics office said industrial production in the region declined 0.7 percent in December from a revised 1.6 percent increase the previous month. Analysts forecast a drop of 0.3 percent. The region’s economy grew 0.2 percent in the three months through December, according to the analysts in a Bloomberg News survey before the report on Feb. 14.

“The euro has lost a lot of ground,” Alex Edwards, London-based manager of corporate business at currency brokerage UKForex, a subsidiary of OzForex Group, said in a phone interview. “There are still threats of deflation, and we expect to see more of these comments in the run up to the ECB meeting next month. There’s a real chance they’ll cut rates into negative territory.”

The pound rose for a second day versus the dollar and euro on speculation Bank of England Governor Mark Carney will struggle to hold down interest rates as the U.K. economy improves.

Central Bank

The central bank expects fourth-quarter growth to be revised up to 0.9 percent from the 0.7 percent estimated by the statistics office, and forecast a similar pace of expansion this quarter. For the full-year 2014, it raised its projection to 3.4 percent from 2.8 percent in November.

The U.K. is the “leader of the tightening pack” and the Bank of England is likely to validate higher short rates soon, Bill Gross, the co-founder of Pacific Investment Management Co., said via Twitter.

The pound strengthened 0.9 percent to $1.6596. Sterling advanced 1.2 percent to 81.91 pence per euro, reaching the steepest climb since Dec. 18.

U.S. retail sales stagnated in January after a 0.2 percent gain the month before, according to the median estimate of economists surveyed by Bloomberg News before the U.S. Commerce Department reports the data tomorrow.

The euro has lost 0.8 percent this year, the worst performer after the Canadian dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has gained 0.4 percent and the yen has risen 3.4 percent, the biggest gainer.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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