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Euro Near Three-Month Low as Volatility Surges Before ECB Meet

The euro was 0.1 percent from its weakest in three months and a gauge of currency volatility yesterday rose to a two-week high as traders speculated on the policy action the European Central Bank will take today.

The euro fell yesterday versus the dollar with ECB President Mario Draghi and his colleagues having signaled all options are up for discussion. The greenback has advanced this week against 15 of its 16 major peers with Treasury yields climbing amid signs of strength in the economy. A report tomorrow is forecast to show the U.S. added more than 200,000 jobs for a fourth month in May. Australia’s dollar fell briefly after data today showed an unexpected trade deficit.

“The market consensus is for at least a rate cut, but it’s what the ECB does in addition to that that’s the question,” said Yasuhiro Kaizaki, a vice president for global markets in New York at Sumitomo Mitsui Trust Bank Ltd. “Whatever it is, I doubt they’ll stop there. The trend for a weaker euro will continue.”

The common currency fetched $1.3598 as of 11:01 a.m. in Tokyo after falling 0.2 percent to $1.3599 yesterday. It touched $1.3586 on May 29, the least since Feb. 13. The euro dropped 0.2 percent to 139.46 yen. The dollar slipped 0.2 percent to 102.56 yen, after yesterday touching 102.80 yen, the highest level since May 2.

JPMorgan Chase & Co.’s Global FX Volatility Index rose for a third day yesterday and reached 6.55 percent, the highest since May 16. It fell to 6.07 percent on May 30, the least since June 2007.

Price Swings

The implied volatility on one-day options on the euro-dollar exchange rate surged to as much as 19.7 percent today, the highest in more than a year, from 4.3 percent at the end of last week. Implied volatility, which traders use as an input to set options prices and signals expectations for the pace of currency swings, rose to as high as 7.3 percent on one-month contracts, from 5.8 percent on May 30.

A Societe Generale SA survey found traders are betting the euro will fall against the dollar and are waiting to sell on rallies, Sebastien Galy, a senior currency strategist at the company in New York, wrote in an e-mail.

Two euro-area central-bank officials said ECB President Mario Draghi will probably signal that any interest-rate cut this week won’t be the last. He may reiterate his commitment to keeping borrowing costs at current or lower levels, they said, asking not to be identified because the talks aren’t public.

Negative Rate

Policy makers will cut the deposit rate to negative 0.1 percent from zero, according to economists in a Bloomberg News survey. A negative rate would mean banks will be charged for parking excess cash with the ECB overnight.

The dollar gained versus the yen yesterday after the Institute for Supply Management reported its non-manufacturing index increased to 56.3 in May from 55.2 a month earlier. Economists surveyed by Bloomberg forecast 55.5.

A government report due tomorrow will show employers added 215,000 nonfarm jobs last month, economists surveyed by Bloomberg forecast, versus an increase of 288,000 in April.

The Fed’s Beige Book business survey said seven of its 12 districts saw “moderate” growth, with the rest characterized as “modest.” The labor market “generally strengthened,” the report, released yesterday, said.

In Australia, the trade balance unexpectedly fell into deficit in April. The shortfall was A$122 million ($113 million), compared with an upwardly revised A$902 million surplus the previous month, the statistics bureau said today in Sydney. The median estimate of economists polled by Bloomberg was for a A$510 million surplus.

The Australian dollar fell as much as 0.2 percent before trading at 92.77 U.S. cents, unchanged from yesterday. It gained 0.3 percent in the previous two sessions.

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