Euro Drops on Draghi’s Deflation Comments; Yen Climbs as Haven

The euro fell versus the dollar as the European Central Bank signaled it’s monitoring gains in the currency for deflation risks. The yen rose on demand for a haven amid turmoil in Ukraine and pessimism about China’s economy.

Europe’s shared currency sank as ECB President Mario Draghi said its level is “increasingly relevant in our assessment of price stability.” It earlier approached $1.40, the highest in more than two years. The greenback slid against the yen even after U.S. retail sales rose for the first time in three months. Yen weakness is a top three- to six-month trade conviction, Goldman Sachs Group Inc. said in a report. Australia’s dollar gained as employers added the most full-time jobs since 1991.

“The ECB is reacting in part to the trend in the euro,” Sebastien Galy, a senior currency strategist at Societe Generale SA in New York, said in an e-mail. While “$1.40 means little to an economist, it does a lot to corporates complaining to their central banks.”

The euro fell 0.3 percent to $1.3868 at 5 p.m. New York time, after rallying earlier to $1.3967, the highest since October 2011. The yen strengthened 0.9 percent to 101.84 per dollar and touched 101.54, the strongest level since March 4. The Japanese currency climbed 1.1 percent to 141.25 per euro and reached 140.72, the strongest since March 6.

Europe’s shared currency gained 6.9 percent over the past year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen lost 6.7 percent, and the dollar fell 0.8 percent.

Treasury Yields

Japan’s currency extended its advance against the dollar today as yields on U.S. Treasury 10-year notes dropped, dimming the appeal of dollar-denominated assets. The yields sank as much as nine basis points, or 0.09 percentage point, the most since Jan. 23 on an intraday basis, to 2.64 percent. They increased earlier to 2.75 percent.

“We expect another leg of yen weakness as it becomes clear over the summer that the first round” of stimulus by the Bank of Japan isn’t enough to meet the government’s goal to raise inflation to 2 percent, Goldman Sachs strategists Robin Brooks and Fiona Lake said in a report issued today.

This will spur the central bank into another round in about June that will weaken the yen to 107 per dollar by mid-year and to 110 by year-end, they wrote.

Volatility Rises

Deutsche Bank AG’s Currency Volatility Index, based on three-month implied volatility on nine major currency pairs, rose for the first time in four days. It jumped 22 basis points to 7.36 percent, a one-week high, after falling to 7.14 percent yesterday, the lowest level since December 2012.

The U.S. and Germany stepped up pressure on Russia to back down from plans to annex Crimea from Ukraine after the region holds a referendum in three days, warning they’ll exact an economic toll if Russia doesn’t.

Since shortly after the U.S. retail-sales data, “it’s been one way down for dollar-yen,” Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut, said in a phone interview. “Ukraine is definitely out there, of course, and is adding tension.”

Retail sales rose 0.3 percent in February, according to a Commerce Department report, pointing to an economy regaining traction after a harsh winter. Sales dropped 0.6 percent the previous month, more than initially reported.

Draghi said his forward guidance may help to weaken the euro and lower real interest rates. He said in a speech in Vienna that “any material risk of inflation expectations becoming unanchored will be countered with additional monetary-policy measures.”

More Vocal

While central-bank officials in Europe have been more vocal about the common currency, markets may doubt whether the ECB, which cut its benchmark rate to a record-low 0.25 percent in November, has the flexibility to ease further, Robert Lynch, a currency strategist at HSBC Holdings Plc in New York.

“For months, you had virtually no comments on the currency, and now in the past week, more days than not, you’ve had ECB officials commenting on the euro,” Lynch said in a phone interview. “One of the main things that’s different is the ECB, in the market’s view, has a lot less policy flexibility.”

ECB Governing Council member Christian Noyer said March 10 in a Bloomberg Television interview that a strengthening euro creates unwarranted pressure on the euro-area economy.

“A lot of people are talking about the $1.40 level on the euro,” Marc Chandler, a currency strategist in New York at Brown Brothers Harriman & Co., said in a phone interview. “Above $1.40, I think people will also come around to my view that it increases likelihood the ECB is going to cut next month. I was thinking the $1.40 area would be the top, but I could see a move toward $1.42.”

Gradually Recovering

The euro region’s economy is gradually recovering in line with the central bank’s baseline scenario, Draghi said on March 6 after policy makers left the main refinancing rate at 0.25 percent.

Australia’s dollar climbed after the statistics bureau said employers added 47,300 positions last month, surpassing the 15,000 gain forecast in a Bloomberg survey.

The Aussie gained as much as 1.3 percent to 91.04 U.S. cents, the highest since March 7, before trading at 90.31 cents, up 0.5 percent.

The Canadian dollar rose against the majority of the greenback’s 31 most-traded peers, gaining 0.4 percent to C$1.1076 per U.S. dollar. Poland’s zloty was the biggest loser, dropping 0.6 percent to 3.0560 per dollar.

China’s retail sales increased at a weaker-than-forecast 11.8 percent annual pace in the first two months of the year and the nation’s growth in industrial production slowed to an 8.6 percent rate, data showed. China reported over the past week its biggest trade deficit in two years and slowing inflation.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Greg Storey, Kenneth Pringle

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