- Terror operation adds to pressure from policy divergence
- Shared currency pares initial drop as European stocks rebound
The euro fell to a seven-month low versus the dollar, erasing its first weekly gain in a month, amid concern the terror attacks in Paris will hinder Europe’s economy.
The slide extends a decline of more than 5 percent during the past month on speculation the European Central Bank will expand monetary stimulus at its December meeting. That reinforces the prospect of a policy divergence with the Federal Reserve, which may raise interest rates as early as next month.
"The markets were a little shaky in the morning -- history shows that after these events, any reaction is temporary,” Aurelija Augulyte, macro strategist at Nordea Markets in Copenhagen, said by phone. "The reason why the dollar is a little bit stronger is everyone is now looking into Fed minutes and U.S. inflation to see some improvement and that will indicate that the Fed is still going to hike in December."
U.S. inflation data are scheduled to be released Tuesday. The Fed will publish minutes from its October meeting on Nov. 18.
The euro declined 0.8 percent to $1.0686 as of 5 p.m. in New York. That was the weakest close since April 15. The yen weakened 0.5 percent to 123.18 to the dollar.
New Zealand’s dollar fell as much as 1.1 percent, dropping to a six-week low at 64.69 U.S. cents before a milk powder auction Tuesday.
The common currency dropped against almost all of its major peers as ECB Vice President Vitor Constancio said policy makers have further monetary policy options if more stimulus is needed in the euro area. The ECB meets Dec. 3 amid speculation it will increase efforts to bolster inflation and economic growth in the region.
“The initial steep decline in the euro reflected concern and uncertainty as to what impact the Paris events would have on the economy,” said Alvin T. Tan, a London-based strategist at Societe Generale SA. “But the currency has since recouped some lost ground as the economic concern is likely to be transitory. The focus in the market remains firmly on policy divergence between the ECB and the Fed.”
The history of terror incidents around the world during the past 15 years shows market reactions have become increasingly short-lived.
“I don’t think the horrific events on Friday will sustainably cause a change to macroeconomic themes,” said Richard Benson, a money manager at Millennium Global Investments Ltd. in London. “Central-bank policy divergence is a central pillar of my investment thesis and the Fed is not yet fully priced for December liftoff, while the euro is not far off being fully priced.”