Euro Gains as ECB Signals Deflation Risk Is Contained

The euro gained against 12 of its 16 major counterparts as European Central Bank policy makers signaled deflation risks are contained, subduing speculation of a round of bond-buying to boost prices and economic growth.

The shared currency snapped a three-day slump versus the U.S. dollar as ECB executive board member Yves Mersch said deflation risks aren’t imminent and Governing Council member Ewald Nowotny signaled there is no immediate need for action. A measure of implied price swings in currency markets fell to the lowest in more than six years before minutes of the Federal Reserve’s March meeting. The ruble fell amid pro-Russian protests in eastern Ukraine. The greenback dropped with stocks.

Mersch is “putting a softening edge on ECB quantitative easing, saying there’s a very big difference between QE in theory and actually implementing it,” Richard Cochinos, the head of Americas Group of 10 currency strategy at Citigroup Inc. in New York, said of a bond-buying program intended to boost asset prices. “Europe is oversold. Globally, we’re seeing clients demand higher yielding assets and carry currencies in both the G-10 and emerging markets.”

The euro rallied 0.3 percent to $1.3742 versus the dollar after as of 5 p.m. in New York. The U.S. currency weakened 0.2 percent to 103.10 yen, while Japan’s currency traded down 0.1 percent to 141.67 yen per euro.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major counterparts, fell 0.2 percent to 1,014.65 after dropping 0.3 percent on April 4.

Ruble, Aussie

Russia’s currency depreciated 1.1 percent to 41.6396 versus the central bank’s basket of dollars and euros, after advancing for the past three weeks. The nation’s bonds and stocks also weakened.

Protesters calling for a boycott of May 25 presidential elections in Ukraine occupied government buildings in Donetsk, Kharkiv and Luhansk over the weekend. Russian markets recovered in the second half of March after President Vladimir Putin’s annexation of Ukraine’s Crimea region triggered a selloff.

Australia’s dollar fell after trading 0.3 percent from a more than four-month high against the greenback after traders cut bearish bets to the least in almost a year.

The Aussie declined 0.2 percent to 92.70 U.S. cents from April 4, when it reached 93.08, the highest since Nov. 21.

Equities Tumble

The dollar declined versus most major peers as the Standard & Poor’s 500 Index of stocks fell to a three-week low, erasing the gauge’s gain for the year. Ten-year Treasury yields touched 2.68 percent, their lowest since March 28.

“The equity selloff has triggered a safe-haven move back into U.S. Treasuries, which has mechanically driven the dollar lower as U.S. yields fall,” said Sebastien Galy, a senior currency strategist at Societe Generale SA in New York.

The S&P 500 dropped 1.1 percent. The MSCI Asia Pacific Index of shares fell 0.5 percent and the Stoxx Europe 600 Index declined 1.2 percent and

The JPMorgan Global FX Volatility Index dropped 27 basis points, or 0.27 percentage point, to 7 percent, the lowest since July 2007 on a closing-market basis. The gauge averaged 10.98 percent in the past five years.

Currency-market price swings are being held in check amid still-accommodative monetary policy around the world. While falling volatility tends to reduce trading revenue for banks, it also boosts potential returns for investors who borrow in low-yielding currencies and buy assets with higher returns, known as the carry trade.

Leveraged funds held 34,199 more contracts betting on a decline in IntercontinentalExchange Group Inc.’s Dollar Index than wagers it will rise as of April 1, data from the Commodity Futures Trading Commission in Washington show. That’s the most since the figures became available in July 2010.

Fed Minutes

The Fed will release minutes of its March 18-19 meeting on April 9. Policy makers at the gathering cut monthly bond purchases by $10 billion to $55 billion. Fed Chair Janet Yellen said the central bank may start to raise interest rates “around six months” after ending its asset-buying program.

“There are two drivers in favor of the stronger dollar -- there’s a tighter monetary policy and a recovering U.S. economy,” Alexander Friedman, global chief investment officer at UBS AG’s wealth-management unit, said today in an interview on Bloomberg Television’s “On The Move” with Francine Lacqua. “It is recovering more than in Europe, so we feel somewhat confident about that.”

Yield Gap

The dollar gained the past three weeks versus the euro as the extra yield on 10-year Treasuries over similar-maturity German bunds rose to the highest since 2005. That’s left the currency pair little changed from the start of the year, after it traded in the narrowest range for a quarter since 2007 in the three months ended March.

Treasury 10-year notes yielded 116 basis points more than their German counterparts, after the spread expanded to 119 basis points on April 3, the most since October 2005, based on closing prices.

Citigroup’s foreign-exchange flow data indicates euro selling before and after the ECB’s meeting, as well as after U.S. payroll data on Friday, Cochinos said. Citigroup is the second-biggest currency trader behind Deutsche Bank AG.

“Clients are now getting stopped out of all those positions,” he said in a phone interview. A stop-loss is a level designated for a sell order.

‘Downward Pressure’

ECB president Mario Draghi said last week that the Governing Council is “unanimous” in exploring tools including asset purchases, prompting a surge in euro-area bonds, with Spain’s five-year note yields falling below U.S. equivalents for the first time since 2007.

“The downward pressure on the euro is already diminishing,” Robert Lynch, a currency strategist at HSBC Holdings Plc in New York, wrote in a client note. Comments including those from Mersch and Nowotny that downplay the need “for QE raise questions about the stance of the full Governing Council on the matter and in so doing partially counter the euro-bearish effects of Draghi’s remarks”

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 Kenneth Pringle, Greg Storey

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