Euro Drops With Yen on Increasing Bets for Central Bank Stimulus

  • ECB's quarterly survey shows analysts cut inflation outlook
  • Yen set for biggest weekly drop in more than two months

The euro and yen were set for their biggest weekly drops this year as traders braced for more stimulus measures after a global market rout strengthened the currencies.

The euro fell for a third day after European Central Bank President Mario Draghi said Thursday the central bank may reconsider its policy stance in March. The yen weakened against most of its major peers this week on speculation the Bank of Japan is preparing to boost currency weakening stimulus as soon as next week.

“Risk appetite is better today on the back of Draghi’s policy hint and given the better price of oil,” said Jane Foley, a senior currency strategist at Rabobank International in London. “While there might be some pullback in these currencies, I would expect investors to stay nervous.”

The euro slipped 0.5 percent to $1.0819 as of 10:36 a.m in New York, extending its decline this week to 0.9 percent, the most since the final week of 2015. The yen dropped 0.7 percent to 118.51 per dollar. Japan’s currency has depreciated 1.3 percent this week, the most since a 2 percent decline in the period ended Nov. 6. It’s still the best performer against the greenback among 16 major currencies this year and reached 115.98 on Wednesday, its strongest level since Jan. 16, 2015.

‘No Limits’

Draghi set the euro area up for expanded monetary stimulus for the third time in a year as China’s economic slowdown and market volatility threaten to derail the region’s recovery.

ECB policy makers will review their programs at the next policy session in March and there are “no limits” on how far they’re willing to deploy measures within their mandate, Draghi said. An ECB quarterly survey published on Friday showed external analysts cut their inflation outlook for this year and next, backing the case for more stimulus.

Goldman Sachs Group Inc. on Thursday revived its bearish call on the euro to drop to 95 U.S. cents in the next 12 months after the ECB signaled the possibility of renewed easing. That call came less than two months after the New York-based bank changed its year-end forecast for the shared currency to $1.

Concern about a slowdown in China’s economy and oil prices tumbling to 12-year lows have triggered risk aversion, sending global equities tumbling this year and boosting the yen and euro as haven assets.

Yen’s Bias

The yen’s rise to a one-year high this week intensified talk of the BOJ having to add stimulus to counter the adverse impact of a stronger yen on the Japanese economy and the bank’s 2 percent inflation target. The Nikkei Asian Review reported that central-bank Governor Haruhiko Kuroda is considering steps to counter the hit to inflation from crude’s slide. The BOJ holds its policy meeting Jan. 28-29.

Kuroda, until now, has been resisting further expansion of the asset-purchase program since 2014, arguing that the repeated reductions in forecasts for consumer prices largely resulted from falling oil costs, which are beyond the central bank’s influence.

“It’s not clear to what extent BOJ speculation is helping the recovery in Japanese stocks and the weakening of the yen, as some remain doubtful of more easing next week,” said Masafumi Yamamoto, chief currency strategist in Tokyo at Mizuho Securities Co. “Another slump in oil prices can easily wipe out these moves.”

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