Euro Weakens as Draghi Open to Negative Deposit Rate

The euro fell for the first time in five days against the dollar after European Central Bank President Mario Draghi said policy makers may take the unprecedented step of charging banks to hold excess reserves.

The single currency dropped against all except one of its 16 most-traded peers as the ECB cut its main refinancing rate and Draghi said policy makers had an open mind on a negative deposit rate. The dollar rose the most in almost two weeks versus the yen after number of Americans filing claims for jobless benefits unexpectedly dropped to a five-year low. Sweden’s krona slid as manufacturing in the nation shrank.

A deposit rate below zero “would be a potential game-changer for the ECB,” Joe Manimbo, a market analyst at Western Union Business Solutions, a unit of Western Union Co., said in a phone interview from Washington. “It would compel banks to flood the financial system over there with euros, which would inherently put downward pressure on the single currency.”

The euro dropped 0.9 percent to $1.3065 at 5 p.m. in New York after strengthening 1.3 percent during the previous four days. The 17-nation currency declined 0.3 percent to 127.95 yen. The dollar gained 0.6 percent to 97.94 yen. It climbed as much as 1 percent, the biggest intraday jump since April 19, after falling 0.3 percent earlier to 97.09 yen.

Rand Climbs

The South African rand gained the most in six months versus the euro as the ECB cuts spurred demand for higher-yielding, emerging-market assets. The currency appreciated 1.7 percent to 11.6924 per euro and climbed as much as 2 percent, the most since October.

Sweden’s krona weakened for the first time in seven days against the dollar after Swedbank AB said its index of manufacturing based on a survey of purchasing managers fell to 49.6 in April from 52.1 the previous month. The krona dropped 1.1 percent to 6.5417 to the greenback.

Denmark’s krone declined versus most major peers after the nation’s central bank lowered its key interest rate as policy makers in Copenhagen defended the currency’s peg to the euro. Nationalbanken said in a statement it cut its lending rate to 0.2 percent, from 0.3 percent.

The Danish krone sank 0.9 percent to 5.7059 per dollar. It was little changed against the euro at 7.4547.

Options Trading

Trading in over-the-counter foreign-exchange options totaled $22 billion at 5 p.m. New York time, compared with $21 billion yesterday, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the euro-dollar exchange rate amounted to $6 billion, the largest share of trades at 27 percent. Dollar-yen options were the second most actively traded, at $3.9 billion, or 18 percent.

Euro-dollar options trading was 27 percent above the average for the past five Thursdays at a similar time in the day, and dollar-yen options trading was 71 percent below, according to Bloomberg analysis.

The ECB, meeting in Bratislava, Slovakia, cut its benchmark rate by a quarter-percentage point to 0.5 percent. It reduced its marginal lending rate, which banks use for overnight credit, to 1 percent, from 1.5 percent, and kept its deposit rate, which banks receive when they park cash with the central bank, at zero.

Asked at a press conference if further action could include taking the deposit rate into negative territory, Draghi said the central bank is “technically ready” and that “we will look at this with an open mind.” He said the ECB also will continue to lend banks as much money as they need at least until mid-2014.

‘Clearly Spooked’

“The euro was quite upbeat until Draghi made his comment that the ECB would be able to cope with any consequences of negative deposit rates,” said Daragh Maher, a currency strategist at HSBC Holdings Plc in London. “Previously, the language of the ECB on this front has characterized it as uncharted waters. Today, it seems the ECB is more open to the idea. The euro was clearly spooked.”

A gauge of manufacturing in the euro area declined to 46.7 last month from 46.8 in March, London-based Markit Economics said today before the ECB decision. The reading has been below 50, which indicates contraction, for 21 consecutive months.

The dollar strengthened for the first time in six days against the yen after the U.S. Labor Department said initial claims for jobless benefits fell to 324,000 last week, the fewest since January 2008. Economists in a Bloomberg survey forecast 345,000 claims.

China Report

Japan’s currency rose earlier against most major peers as data showed China’s factory output slowed, spurring demand for the relative safety of the yen. HSBC Holdings Plc and Markit Economics said their index of Chinese manufacturing fell to 50.4 in April from 51.6 the previous month.

The yen has dropped 3.2 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-market currencies. The dollar gained 2.9 percent and the euro fell 1.9 percent.

The greenback is poised to rise further as U.S. growth prospects outstrip much of the developed world, Alan Ruskin, global head of Group of 10 foreign-exchange strategy at Deutsche Bank AG in New York, said in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene.

The U.S. currency fell yesterday versus the yen and euro after the Federal Reserve said it will maintain its bond buying at a pace of $85 billion a month to spur growth and is prepared to raise or lower the amount as economic conditions evolve.

(Corrects deposit rate definition in 11th paragraph.)
Before it's here, it's on the Bloomberg Terminal.