The euro fell against the dollar and the yen after the European Central Bank unexpectedly cut its benchmark interest rate as economic growth falters.
The 17-nation currency approached a three-week low versus the greenback after new President Mario Draghi lowered the rate by a quarter percentage point to 1.25 percent and said Europe is heading toward a “mild recession.” The euro strengthened earlier on speculation Greek Prime Minister George Papandreou will withdraw his proposal for a referendum on the nation’s bailout, easing concern voters will reject the plan.
“Draghi’s comments are seen by the market as dovish, and his view on a recession probably spooked the market,” said Geoffrey Yu, a currency strategist at UBS AG in London. “This hurts the euro because it argued for further rate cuts, which would further narrow the yield advantage that the euro has over the dollar.”
The euro dropped 0.4 percent to $1.3687 at 10:12 a.m. in New York, after falling to $1.3609 on Nov. 1, the weakest since Oct. 12. The shared currency declined 0.5 percent to 106.81 yen. It gained as much as 0.6 percent before the ECB announcement.
“The ongoing tensions in financial markets are likely to dampen the pace of economic growth in the euro area in the second half and beyond’ Draghi said at a press conference in Frankfurt following the decision.
Only four of 55 economists surveyed by Bloomberg forecast the 25-basis-point cut. Forty-nine predicted the benchmark would be unchanged. Two expected a half-point reduction.
‘Negative’ for Euro
“The surprise cut will be negative for the euro, and we expect the rate to fall further to 1 percent in coming months,” Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi UFJ Ltd. in London, said. “This will ease demand for the euro among reserve managers.”
The euro is likely to weaken toward $1.32 by year-end, Hardman said. The shared currency will decline to $1.35 by Dec. 31, according to the median forecast of 39 analysts surveyed by Bloomberg News.
Led by Germany and France, European leaders yesterday cut off financial aid for Greece until the planned referendum in December determines whether it deserves a fresh batch of loans needed to stave off default.
“The referendum will revolve around nothing less than the question: does Greece want to stay in the euro, yes or no?” German Chancellor Angela Merkel told reporters after crisis talks before a Group of 20 summit in Cannes, France, today. French President Nicolas Sarkozy said Papandreou’s government won’t get a “single cent” of assistance if voters reject the bailout plan.
Greek Finance Minister Evangelos Venizelos said the bailout should be implemented without delay and his nation’s membership in the euro region cannot depend on a referendum. More than seven in 10 voters said they favored Greece remaining in the euro system, according to a poll last week of 1,009 people published in To Vima newspaper.
“Markets rallied in the late London morning on speculation that Papandreou is losing further support in the government for the referendum which would cause him to lose the elections on Friday or even resign,” Marc Chandler, chief currency strategist at Brown Brothers Harriman & Co. in New York, wrote in a note to clients. “A ‘no’ vote of confidence would likely dash chances of a December referendum, even thought it would leave Greece temporarily without a government.”
Papandreou defied calls to step down after his decision to call a referendum. The premier intends to continue in his post and will address lawmakers during a confidence motion tonight, two party officials said in Athens today, declining to be identified.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against those of six trading partners, climbed 0.3 percent to 77.270.