The $5.3 trillion foreign-exchange market rejected the European Central Bank’s unprecedented effort to weaken the euro, sending the 18-nation currency higher and providing a further headwind to manufacturers already coping with a slowing economy.
After initially tumbling when ECB President Mario Draghi and his fellow policy makers became the first major central bankers to charge fees on deposits and unveiled other plans to support an economy threatened by deflation, the euro quickly recovered on speculation the measures will only serve to attract international investors. After the last ECB meeting on May 8, Draghi said gains in the euro, which that day reached its highest level in 2 1/2 years, were hurting the central bank’s effort to bolster consumer prices.
“Draghi will have to ease again to stem euro strength,” said Eimear Daly, head of market analysis at Monex Europe Ltd. in London. “He doesn’t want the euro above $1.38 and especially not $1.39. If today’s price action is anything to go by, it looks like that is exactly where they are headed.”
Europe’s shared currency strengthened 0.5 percent to $1.3660 at 5 p.m. New York time, the biggest jump on a closing basis in three months. The euro dropped earlier as much as 0.7 percent to $1.3503, the lowest level since Feb. 6. It climbed on May 8 to $1.3993, the highest since October 2011.
The euro added 0.1 percent to 139.90 yen, while the U.S. currency depreciated 0.3 percent to 102.41 yen.
Australia’s dollar and the South African rand climbed against most major counterparts as investors sought higher-yielding assets.
Currency volatility subsided after the ECB’s action, with JPMorgan Chase & Co.’s gauge tracking Group of Seven nations dropping to 6.12 percent, from a five-week high of 6.47 percent it reached earlier.
Implied volatility on one-day options on the euro-dollar exchange rate surged to as much as 22.1 percent, the highest since February 2013, before the ECB meeting. It eased to 11.6 percent after Draghi held a press conference in Frankfurt after the central bank issued its decision.
The ECB cut its deposit rate to minus 0.1 percent, as predicted by economists in a Bloomberg survey. It lowered its key interest rate to a record 0.15 percent and unleashed a package of measures including targeted long-term loans. While the actions are “a significant package,” policy makers are not finished and are willing to do more, Draghi said.
The central bank said it would push on with plans that could see it buying asset-backed securities based on bank loans.
“Quite a few people were disappointed during the Q&A that there was no hint that actual broad-based asset purchases are coming later in the year,” said Jens Nordvig, the New York-based managing director of currency research at Nomura Holdings Inc., in an interview on Bloomberg Television’s “Street Smart” with Trish Regan. “That’s the key point now. Are we going to wait until next year for those?”
Traders had bet Draghi would take action after he said following the last ECB meeting that a stronger euro was a “serious concern” at a time of slow inflation, and that he was “comfortable” with the idea of easing policy.
The ECB chief tried to talk down the euro for months, including an April 24 pledge to start asset purchases if the exchange rate kept inflation depressed. The euro climbed 4.2 percent versus the dollar last year. A stronger currency makes the price of imported goods cheaper and weighs on the euro area’s economy.
The rate cuts “won’t be enough to drive euro-dollar lower on its own,” which will depend more on what action the Federal Reserve takes, said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. The U.S. central bank, which meets June 17-18, is reducing bond purchases it has used to fuel economic growth.
Policy makers only delivered what was expected, making it difficult for the euro to weaken further, Gullberg said.
“While largely in line with expectations and while not nearly as aggressive as it could have been, the overall suite of policy-easing measures will continue to weigh on the euro,” Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage, said in a telephone interview.
Hedge-fund managers and other large speculators increased bets last month to the most since July that the euro will weaken against the dollar. The difference in the number of wagers on a decline in the common currency, compared with those on a rise -- so-called net shorts -- was 16,633 on May 27, compared with 9,220 a week earlier, according to data from the Commodity Futures Trading Commission.
The currency will fall to $1.32 by year-end, according to the median forecast of analysts surveyed by Bloomberg News. That’s unchanged since May 8.
The Bloomberg Dollar Spot Index briefly jumped, touching a two-month high, after a Labor Department report showed fewer Americans filed unemployment-benefit applications over the past month than at any time since June 2007. The four-week average for jobless claims fell to 310,250 in the period ended May 31.
The gauge, which tracks the greenback against 10 major counterparts, climbed to 1,017.54, the highest since April 4, before falling to 1,011.98. The currency ended the day down against 15 of its 16 major counterparts.
A private report yesterday showed U.S. companies hired fewer employees last month than forecast. Data from ADP Research Institute showed companies added 179,000 workers after increasing payrolls by a revised 215,000 the previous month. Economists in a Bloomberg survey estimated a decline of 210,000.
“With the jobless claims that we saw today and the ADP figures we saw yesterday, there’s still quite a bit of spare capacity in the U.S. economy,” Lennon Sweeting, a San Francisco-based dealer at the broker and payment provider USForex Inc., said in a phone interview. “There’s not much going on to compel the Fed to move rates anytime soon.”
The dollar gained 1.4 percent in the past month, in a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Australia’s currency was the second-best performer, adding 1.3 percent. The euro slumped 0.8 percent.
The Australian dollar advanced for a third day against the dollar, adding 0.7 percent to 93.40 U.S. cents, and New Zealand’s currency snapped a three-day losing streak to climb 0.9 percent to 84.99 U.S. cents. The South African rand strengthened 0.8 percent to 10.6873 per U.S. dollar.