Euro Drops to 14-Month Low on ECB; Dollar Strengthens

The euro dropped to the lowest level in almost 14 months after the European Central Bank unexpectedly cut its main refinancing rate to a record 0.05 percent and introduced additional stimulus.

The shared currency fell against 31 major peers after ECB President Mario Draghi said the central bank will buy “a broad portfolio” of asset-backed securities starting next month. A dollar gauge gained as a report showed U.S. service industries climbed in August, bolstering chances for the Federal Reserve to raise interest rates. The yen approached the weakest since 2008 after the Bank of Japan kept its record stimulus unchanged.

“There were big expectations, and they met and exceeded those expectations with doing more,” Eric Stein, who oversees about $13 billion at Boston-based Eaton Vance Corp., said in a phone interview. “Draghi is on a clear path to provide as much monetary stimulus as he can to weaken the currency, increase inflation expectations, decrease deflationary expectations, and also keep the European economy on life support.”

The euro slid 1.6 percent, the biggest drop on a closing basis since November 2011, to $1.2944 at 5 p.m. New York time. It reached $1.2920, the lowest since July 10, 2013. The shared currency fell 1.1 percent to 136.25 yen, the least since November.

Japan’s currency declined 0.5 percent to 105.27 per dollar and touched 105.37. It depreciated to 105.44 yen on Jan. 2, the weakest since October 2008.

Currency Cap

The Swiss National Bank could find itself defending its currency cap again via interventions in response to the ECB actions. The franc, on which the SNB has an upper limit of 1.20 per euro, touched its strongest since November 2012, 1.20449 per euro, before trading at 1.20624. The Zurich-based central bank says it hasn’t intervened to defend the minimum exchange rate in two years.

“It’s clear that the SNB will intervene again if the franc gets to 1.20,” said Maxime Botteron, a Credit Suisse Group AG economist in Zurich. “But there’s no reason to ease policy further and take supplementary measures for the time being.”

The ECB’s decision to lower the refinancing rate by 10 basis points, or 0.1 percentage point, was forecast by just six of 57 economists surveyed by Bloomberg News. The remainder predicted policy makers would leave it unchanged at 0.15 percent. The bank cut the deposit rate to minus 0.2 percent.

The central bank will start buying securitized debt and covered bonds, Draghi said. Details are to be announced in October. A bond-buying program, or quantitative easing, was also discussed, he said.

‘Weaker Euro’

“The rate cuts have clearly taken the market by surprise, judging by the immediate euro reaction,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London. “It’s clear the ECB wants a weaker euro and they are prepared to do what is necessary to get it.”

Kinsella said Commerzbank forecasts the euro will fall to $1.25 by end of March 2015.

The euro has dropped 2.1 percent in the past month, the worst performer in the Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar gained 1.9 percent, while the yen dropped 0.9 percent.

“The ECB went a little bit ahead of what the market had expected,” Mark McCormick, a foreign-exchange strategist at Credit Agricole SA in New York, said in a phone interview. “The risks are that we do have a short squeeze in the euro given how much market positioning has moved ahead of the ECB. We’re setting ourselves up for a sustainable downtrend in the euro come 2015.” A short squeeze is when traders are forced to buy back a currency after they sold it in a bet it would fall.

Japan Stimulus

The yen weakened versus the dollar after central-bank Governor Haruhiko Kuroda said a stronger greenback wasn’t particularly negative for the Japan.

The Bank of Japan kept its record stimulus unchanged at the conclusion of a two-day meeting, maintaining its pledge to increase the monetary base at an annual pace of 60 trillion yen ($570 billion) to 70 trillion yen.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major counterparts, reached 1,039.77, the highest level since July 15, 2013.

The U.S. services business expanded at the fastest pace since August 2005. The Institute for Supply Management’s non-manufacturing index climbed to 59.6, from 58.7 a month earlier, the Tempe, Arizona-based group said today. Readings greater than 50 signal expansion.

U.S. nonfarm payrolls increased by 230,000 jobs last month, economists in a Bloomberg survey forecast before the Labor Department reports the data tomorrow. It would be the seventh straight month of gains exceeding 200,000.

Rate Bets

There’s a 47 percent chance the Fed policy makers will raise the benchmark interest-rate target to at least 0.5 percent by June 2015, futures data compiled by Bloomberg showed. A 39 percent likelihood was seen two weeks ago. The Fed’s next policy meeting is scheduled for Sept. 16-17.

Canada’s dollar rallied 1.7 percent against the euro, the most of 16 major peers. The pound gained 0.8 percent.

Sterling fell to its lowest level versus the dollar since February, weakening as much as 0.8 percent to $1.6330, as the Bank of England kept its policy rate unchanged.

“With U.S. data continuing to surprise on the upside this week, the combination is very powerfully negative for euro-dollar,” Daniel Katzive, a director and head of foreign-exchange strategy, North America, in New York at BNP Paribas SA, said in a phone interview. “We think the euro has a lot further to fall versus a lot of the crosses, including sterling and Canada.”

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