Euro Slides to Six-Week Low on Draghi Comments; Krona Weakens

The euro declined to a six-week low versus the dollar as European Central Bank President Mario Draghi said officials discussed an interest-rate cut at today’s policy meeting.

The 17-nation currency also weakened against the yen as Draghi, speaking after the ECB kept borrowing costs at a record-low 0.5 percent, said he would consider a further reduction if money-market rates climbed too high. The dollar rose through 100 yen for the first time since July on speculation signs of improvement in the U.S. economy will compel the Federal Reserve to taper stimulus as early as this month. Foreign-exchange trading surged to an average $5.3 trillion a day in April 2013, a Bank for International Settlements report showed.

“Draghi is still not very confident about the economic recovery, and that’s contributing to the weakness in the euro,” Douglas Borthwick, head of foreign exchange at Chapdelaine & Co. in New York, said in a telephone interview. “The market knows very well that the ECB is going to be on hold with a bias towards lower rates for the foreseeable future.”

The euro slipped 0.7 percent to $1.3120 as of 5 p.m. New York time, after reaching the weakest since July 19. The dollar strengthened 0.4 percent at 100.11 yen after climbing to the strongest since July 25. The euro depreciated 0.3 percent to 131.34 yen.

Krona, Rupee

Sweden’s krona declined versus all of its 16 major peers as the nation’s central bank stuck to a plan to raise borrowing costs late next year. The krona dropped 1.3 percent to 6.6786 per dollar after reaching the weakest level since July 16. It fell 0.7 percent to 8.7623 per euro.

India’s rupee advanced versus all 31 of its most-traded counterparts after the country’s new central bank governor took steps to boost dollar supply and lawmakers moved closer to allowing foreign investment in pension funds. The currency appreciated 1.5 percent to 66.1150 per dollar after climbing as much as 2.3 percent, prices from local banks compiled by Bloomberg show.

The pound reached a four-month high versus the euro as the Bank of England held its bond-purchase target at 375 billion pounds ($584 billion). The decision was predicted by all 38 analysts in a Bloomberg survey. Policy makers also kept the key interest rate at a record-low 0.5 percent.

Sterling increased 0.4 percent to 84.16 pence per euro after reaching 84.08, the strongest level since May 6. The pound declined 0.2 percent to $1.5590.

Trading Surge

Foreign-exchange trading surged to an average $5.3 trillion a day in April 2013, boosted by greater yen volumes, the BIS said. Trading increased 33 percent since the same period in 2010, the BIS said, citing a survey of currency traders it runs every three years.

The role of the Chinese yuan in foreign-exchange trading “surged in line with efforts to internationalize the Chinese currency,” the BIS said. Turnover in the Chinese currency jumped to $120 billion a day from $34 billion a day in April 2010 as it became the ninth most-actively traded currency with a 2.2 percent share of global volumes.

Trading today in over-the-counter foreign-exchange options totaled $28.5 billion, compared with $25.9 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 dollar-yen exchange rate totaled $6.5 billion, the largest share of trades at 23 percent. Options on the Aussie dollar-U.S. dollar pair amounted to $4.4 billion, or about 15 percent.

Dollar-yen options trading was 34 percent more than the average for the past five Thursdays at a similar time in the day. Aussie dollar-U.S. dollar options trading was 159 percent more than average.

Bearish Yen

The yen commenced a bearish trend after closing yesterday weaker than key support at 99.60 per dollar, Roelof-Jan Van den Akker, an Amsterdam-based technical analyst at ING Group NV, wrote today in a client note. The currency may fall to 101.35, its weakest level since July 8.

The EBB’s Draghi is trying to convince markets that he will keep interest rates low for an extended period to support the euro area’s recovery from its longest-ever recession. Rate expectations have risen close to levels that he described last month as “unwarranted,” suggesting some investors are questioning his promise.

While the ECB raised its forecasts for the euro area’s economic growth this year, it cut the projection for 2014. Gross domestic product will climb 1 percent next year, the ECB said, compared with a 1.1 percent increase forecast previously.

Rate Pressure

“The downward revision to 2014 growth suggests the ECB, as a whole, is looking through a lot of the recent upside in the data, and cuts were hinted at today,” said Stephen Gallo, European head of currency strategy at Bank of Montreal in London. “The Fed is moving towards taper, and other major central banks are doing what they can to resist the upward pressure on rates.”

The Institute for Supply Management’s non-manufacturing index rose to 58.6 in August from 56 the prior month, a report from the Tempe, Arizona-based group showed today. The median forecast in a Bloomberg survey called for a drop to 55.

Fewer Americans than forecast filed applications for unemployment benefits last week. Jobless claims declined by 9,000 to 323,000 in the week ended Aug. 31, less than the lowest estimate of economists surveyed by Bloomberg, from a revised 332,000, according to Labor Department data issued today in Washington.

U.S. Data

U.S. nonfarm payrolls rose by 180,000 in August while the jobless rate held at 7.4 percent, the lowest since December 2008, Labor Department data will show tomorrow, according to a separate Bloomberg survey.

Fed policy makers are debating whether the economy is strong enough to allow them to pare monthly purchases of $85 billion in Treasuries and mortgage debt, which tend to debase the dollar. A Bloomberg News survey of economists taken Aug. 9-13 showed that 65 percent of them expected a reduction at the Fed’s meeting on Sept. 17-18.

The dollar has strengthened 5.9 percent this year, according to Bloomberg Correlation-Weighted Indexes. The yen has fallen 9.7 percent and the euro is up 5.2 percent.

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