Euro Falls Most Since July as Draghi Warns of Slowing Inflation

The euro fell the most since July against the dollar after European Central Bank President Mario Draghi said the recent strength of the currency creates a concern that inflation will slow.

The 17-nation euro declined versus all but two of 16 major counterparts as Draghi said after a policy meeting in Frankfurt that the risk to the region’s growth remains on the “downside.” The pound strengthened for a second day after future Bank of England Governor Mark Carney damped speculation he would expand stimulus. New Zealand’s dollar weakened after a government report showed employers cut jobs last quarter. Brazil’s real rose the most of the greenback’s 16 major peers.

“The euro area can ill afford a stronger currency,” Aroop Chatterjee, a currency strategist at Barclays Plc in New York, said in a telephone interview. Draghi “explicitly mentioned foreign-exchange as a risk. That in itself was a big deal and wasn’t expected by most market participants.”

The euro dropped 0.9 percent to $1.3398 at 5 p.m. in New York after declining as much as 1.1 percent, the most since July 5. The currency fell 0.9 percent to 125.44 yen. The Japanese currency was little changed at 93.63 per dollar.

Europe’s shared currency has strengthened 7.2 percent over the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar depreciated 1.9 percent and the yen tumbled 20 percent.

Kiwi, Real

New Zealand’s dollar dropped for a second day against the U.S. currency after the statistics bureau said payrolls fell 1 percent in the final three months of 2012. The workforce participation rate declined to the lowest in eight years.

“The fall in the currency was to be expected given the drop in employment and the participation rate, but we look at these levels as a chance to buy the dips,” said Mike Jones, a currency strategist at Bank of New Zealand in Wellington.

The so-called kiwi currency fell 0.8 percent to 83.30 U.S. cents after sliding 0.7 percent yesterday.

Brazil’s currency gained as much as 1.5 percent to the dollar as its central bank said inflation at the highest in almost eight years is high and requires attention. The real appreciated to 1.9667 to the greenback and touched the strongest level since May.

Euro Strength

There are downside risks to inflation “stemming from weaker economic activity and, more recently, the appreciation of the euro exchange rate,” according to a statement of opening remarks from Draghi placed on the ECB’s website.

The central bank kept its benchmark rate at a record-low 0.75 percent today as forecast by all 60 economists in a Bloomberg News survey.

“What we had not expected today was for the ECB to actually tie directly the higher or stronger euro to the inflation outlook in the euro zone,” Sireen Harajli, a foreign-exchange strategist in New York at Credit Agricole SA, said in a telephone interview. “We think that it does increase the odds of a rate cut. We don’t think it’s going to happen in March, but we think that March will be key in terms of assessing the situation.”

Draghi said the euro’s exchange rate is in line with its long-term average, though officials will monitor it in case a “sustained” appreciation alters the ECB’s assessment of risks to price stability. Germany’s two-year note yield fell four basis points, or 0.04 percentage point, to 0.18 percent.

Pound Gains

The pound rose for a second day versus the euro and the dollar after Carney, the Bank of Canada governor who succeeds Bank of England Governor Mervyn King in July, told lawmakers in London that current monetary policy may be enough to help the economy.

The central bank left its benchmark interest rate at a record-low 0.5 percent and its asset-purchase target unchanged at 375 billion pounds ($589 billion) at a policy meeting today.

“The market was going into the testimony expecting a much more dovish outlook,” said Ned Rumpeltin, head of Group of 10 currency strategy at Standard Chartered Plc in London, referring to a perceived bias to loosen monetary policy. “Carney was much more balanced and well-considered -- that may have caught some people by surprise if they were looking for a much more assertive stance.”

The pound jumped 1.3 percent to 85.26 pence per euro, after depreciating to 87.17 pence on Feb. 1, the weakest since October 2011. Sterling rose 0.3 percent to $1.5716.

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