Draghi’s ‘Whatever It Takes’ Drives Euro Gains Amid Greek Crisis

Updated on
Tsipras Says Europe Won't Dare Kick Greece Out of Euro

The euro headed for its best quarterly gain in four years against the dollar amid speculation the European Central Bank will be able to contain any fallout should Greece default.

The common currency rallied Monday from a near four-week low amid reports German Finance Minister Wolfgang Schaeuble told lawmakers he doesn’t view Greece as a contagion risk. Greek Prime Minister Alexis Tsipras rejected creditors’ aid proposals on Friday, sparking a global rout in stock markets. New Zealand’s dollar fell for a third day as deteriorating business confidence added to speculation the central bank will cut interest rates next month.

“It’s been a dangerous and losing trade to be betting against the euro,” said Ray Attrill, global co-head of currency strategy at National Australia Bank Ltd. in Sydney. “There are enough people around who seem to believe there will be no significant contagion implications and that the ECB and EU policy makers will be circling the wagons and providing whatever help they can. I’m not in that camp.”

The euro was set for a 4.3 percent advance for the quarter and a 1.8 percent monthly gain. The common currency fell 0.5 percent to $1.1185 as of 6:56 a.m. in London. It plunged as much as 1.9 percent on Monday before rallying to end the day 0.6 percent stronger.

The euro has been supported by investors selling the region’s assets and unwinding the hedges that protected them against losses, National Australia Bank’s Attrill said.

‘Whatever It Takes’

In 2012, Draghi said he would “do whatever it takes” to defend the euro and outlined an Outright Monetary Transaction program to buy sovereign bonds of nations that requested aid as bets multiplied that the area would break apart.

“The ECB still have the option of front-loading QE and there is still the big bazooka of the OMT,” Sam Tuck, a senior currency strategist, and Mark Smith, a senior economist, at ANZ Bank New Zealand Ltd., wrote in a June 30 note. “Despite this, fears of contagion linger.”

Tsipras on Friday called for a referendum on creditors’ financial aid proposals and said he would advocate a “no” vote. Greece’s aid program ends Tuesday, the same day it has to pay back $1.7 billion to the International Monetary Fund.

Policy Divergence

The euro will eventually succumb to monetary policy divergence as the Federal Reserve moves closer to raising interest rates, said Eric Stein, who manages the Global Macro Absolute Return Fund in Boston at Eaton Vance Corp. He’s still betting that the currency will weaken.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 of its major peers, rose 0.2 percent to 1,178.40. The gauge has fallen 1.9 percent since March 31, its first quarterly decline in a year.

Fed Chair Janet Yellen indicated this month that policy makers will likely take a gradual approach to raising rates amid concerns the recovery is uneven.

“The dollar’s recent moderation should give the Fed more confidence it can begin the path of slowly hiking interest rates,” Eaton Vance’s Stein said.

New Zealand’s dollar slid 0.6 percent to 68.10 U.S. cents.

The nation’s business confidence index fell to lowest since March 2011, according to Australia & New Zealand Banking Group Ltd. All except three of the 17 economists surveyed by Bloomberg expect the central bank to cut its key interest rate on July 23.

For more, read this QuickTake: The Euro

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