Euro Drops After ECB Official Pledges to Speed Up Bond Purchases

Updated on
Euro Feels the Pain of Greece and ECB Bond Buying

The euro tumbled the most in two months after a European Central Bank official said policy makers plan to boost bond purchases before an anticipated mid-year lull.

The single currency slumped after Executive Board member Benoit Coeure said the ECB will increase purchases under its quantitative-easing program from 60 billion euros ($67 billion) in May and June, ahead of a drop-off in market liquidity. The euro extended losses versus the dollar after a report showed residential construction in the U.S. surged in April to the highest in more than seven years, supporting the Federal Reserve’s move toward raising interest rates.

The move to front-load bond purchases “clearly points to the direction that the ECB wants to have a bigger impact via QE, and vis-a-vis the exchange rate,” Hans Redeker, head of global foreign-exchange strategy in London at Morgan Stanley, said by phone. “The message today was very clear.”

The euro dropped 1.5 percent to $1.1150 as of 5 p.m. in New York, the most since March 19. It slipped 0.9 percent to 134.57 yen. The dollar rose 0.6 percent to 120.69 yen.

A decline by the euro through $1.10 would reignite calls for a drop to parity with the dollar, said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura Holdings Inc. in London. Coeure’s remarks “provided an acute reminder of how fragile and volatile the markets have been in 2015,” McDarby said.

Improving economic data from the euro area has fueled speculation policy makers may curtail asset purchases before a September 2016 end date, lifting the euro from a 12-year low. ECB President Mario Draghi attempted to quell such talk last week, saying the program would be implemented “in full.”

Diverging Policies

The euro fell versus 15 of 16 major peers as Coeure’s comments about injecting money more quickly into the euro-zone economy emerged early Tuesday in the text of a speech delivered in London the day before. ECB Governing Council member Christian Noyer said separately in Paris on Tuesday that the central bank is ready to extend QE if needed.

“Both the Fed and the ECB are somewhat locked into this policy divergence -- that the Fed’s hawkish and the ECB dovish - - and the news today speaks to that,” Daniel Brehon, a New York-based strategist at Deutsche Bank AG, said in a phone interview. “We’re also seeing the dollar move back a little bit more broadly.”

Accelerated stimulus in Europe contrasts with monetary policy in the U.S., where the Fed is inching closer to raising interest rates for the first time since 2006.

Residential construction in the U.S. surged in April, a report showed Tuesday, boosting the case for higher borrowing costs. Housing starts jumped to a 1.14 million annualized rate, the most since November 2007, according to data from the Commerce Department. The Fed releases minutes from its April 29 meeting on Wednesday.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE