Euro Declines the Most Since July Amid ECB Inflation Concern

The euro declined the most since July versus the dollar after European Central Bank President Mario Draghi said a strong currency could slow the region’s economic recovery, lifting bets the bank may lower interest rates.

The yen gained against the greenback for the first time in 13 weeks as the Bank of Japan governor said he will step down early, accelerating a transition that may aid the prime minister’s plan for monetary easing. The BOJ will meet on Feb. 14. The 17-nation euro fell against all but two of its 16 most-traded peers this week as Italian and Spanish bonds slumped amid political turmoil, damping demand for the currency.

“The euro correction is probably long overdue,” Greg Anderson, New York-based head of Group of 10 currency strategy at Citigroup Inc., said yesterday in a telephone interview. “The market bought into the theme that the ECB is going to be the tightest of the G-4 central banks because they won’t do anything while everyone else does quantitative easing. What Draghi did changed the psychology a bit.”

The Federal Reserve, ECB, BOJ and Bank of England comprise the G-4.

The euro declined 2 percent to $1.3366 this week and touched $1.3353 yesterday, its weakest level since Jan. 25. The loss was the euro’s biggest drop since the five days ended July 6. The shared currency fell 2.2 percent to 123.88 yen. The yen depreciated 0.1 percent to 92.88 per dollar after touching 94.06 on Feb. 6, its lowest level since May 5, 2010.

Real, Krona

The Brazilian real was the biggest winner among major currencies this week, climbing 0.8 percent to 1.9727 per dollar. Sweden’s krona fell the most, decreasing 2.2 percent to 6.4479 per dollar.

Futures traders increased their bets that the euro will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 37,952 on Feb. 5, compared with net longs of 27,472 a week earlier.

Net-wagers the yen will fall against the dollar decreased, pushing net-shorts to 68,413.

The euro, which touched a 14-month high of $1.3711 on Feb. 1, has been the best performer this year among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, gaining 2 percent. The yen weakened the most, 6.6 percent, and the dollar increased 0.6 percent.

Pound Rises

The shared currency dropped as Spanish Prime Minister Mariano Rajoy faced calls to resign after newspaper reports alleged he accepted illegal cash payments, and as a poll showed former Italy Premier Silvio Berlusconi closing the gap on front-runner Pier Luigi Bersani even as he appeals a four-year prison sentence for tax fraud.

Spain’s 10-year bond yield climbed to 5.52 percent, the highest since Dec. 11, and Italian 10-year yields reached 4.63 percent, highest since Dec. 14.

The British pound rose the most in two years this week versus the euro amid bets the Bank of England will refrain from extending its stimulus program in contrast to its European counterpart.

Future BOE Governor Mark Carney, the current chief of the Bank of Canada, said on Feb. 7 that current monetary policy may be enough to help the economy, while the ECB’s Draghi said the region’s policy may “remain accommodative.”

‘Aggressive Easing’

“We might see a stronger sterling against the euro,” Eimear Daly, a currency-market analyst at Monex Europe Ltd. in London, said in a Feb. 8 interview. “The market had priced in aggressive easing from Carney and they were probably disappointed. The move was compounded by what we saw from Draghi.”

Sterling appreciated 2.7 percent to 84.59 pence per euro this week, its biggest five-day drop since January 2011. The pound gained 0.7 percent to $1.5796.

Australia’s dollar decreased for a fourth week, the longest stretch since June, after the Reserve Bank cut its economic growth and inflation forecasts, fanning expectations it will lower interest rates.

The RBA predicted “below trend” 2013 growth of about 2.5 percent, compared with around 2.75 percent forecast in November. Consumer prices will rise 3 percent in the year to June 2013, compared with the 3.25 percent increase forecast three months earlier, the central bank said.

‘Rate Cut’

That statement from the RBA followed comments it make on Feb. 5 that the nation’s inflation outlook “would afford scope to ease policy further.”

“The reduction in growth and inflation forecasts is a cause for concern,” Takuya Kawabata, an analyst at Research Institute Ltd. in Tokyo, a unit of Japan’s largest currency margin company, said yesterday. “The recent weakness in the Australian dollar in part stems from speculation of a rate cut by the RBA.”

The so-called Aussie declined 0.9 percent to $1.0318 after falling to $1.0256 yesterday, its lowest level since Oct. 23. The New Zealand dollar fell 1.1 percent to 83.57 U.S. cents.

(Corrects the direction of the yen in the second paragraph.)
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