Euro Loses Most Since July 2012 on ECB Rate-Cut Bets

The euro slid the most in more than a year versus the dollar as weaker-than-forecast economic data for the currency region fueled speculation the European Central Bank will cut interest rates as soon as at its meeting next week.

The greenback climbed the most since June against a basket of 10 major peers after the Federal Reserve said it sees economic improvement even as it plans to maintain stimulus while it awaits evidence of further gains. A gauge of currency volatility rose for the first week since August. Brazil’s real dropped amid concern the nation’s credit rating may be cut.

“The weak unemployment and inflation reports that we saw have drained demand for the euro,” Ravi Bharadwaj, a Boston-based senior market analyst at Western Union Business Solutions, a unit of Western Union Co., said in a phone interview. “These economic measures certainly add to the case for further dovish bias. I would definitely expect the European Central Bank to assume a more cautionary stance on monetary policy.”

The euro fell 2.3 percent to $1.3487 this week in New York, the largest decrease since the five days ended July 6, 2012, after reaching an almost two-year high of $1.3832 on Oct. 25. The shared currency weakened 1 percent to 133.08 yen, while the Japanese currency lost 1.3 percent against the dollar to 98.67.

Dollar Index

The Bloomberg U.S. Dollar Index gained 1.5 percent, the most since the week ended June 21, to 1,015.69. It reached 1,016.58 yesterday, the strongest level since Sept. 18.

JPMorgan Chase & Co.’s Global FX Volatility Index, which monitors price swings among currencies of Group of Seven nations, rose to 8.12 percent yesterday in its first weekly gain since the five days ended Aug. 30. The gauge touched 7.48 percent on Oct. 28, the lowest since December. It has averaged 9.37 percent since the start of the year.

The Brazilian real tumbled as the central bank limited its efforts to support the currency and a widening budget deficit added to concern the nation faces a credit-rating cut. Brazil reported this week a shortfall of 22.9 billion reais ($10.2 billion) in September, versus a 7.6 billion surplus in January. Standard & Poor’s and Moody’s Investors Service this year lowered their outlooks on the country’s credit rating.

The real dropped 3 percent to 2.2538 per dollar and touched 2.2613, the weakest level since Sept. 27.

“The news about the fiscal deficit continues to worry people a lot,” Mauricio Junqueira, who helps oversee 750 million reais at Tese Gestao de Investimentos, said yesterday by telephone from Rio de Janeiro.

Winners, Losers

Canada’s dollar was the biggest winner this week among the greenback’s 16 most-traded counterparts, with a 0.3 percent gain versus the U.S. currency. The South Korean won was the second-best performer, with a 0.1 percent gain. South Africa’s rand was the biggest loser, sinking 3.6 percent, while the Swedish krona dropped 3.4 in the second-worst performance.

The Canadian currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, rose as the nation’s economy expanded 0.3 percent in August, topping forecasts for a 0.1 percent increase. The loonie ended the week at C$1.0420 per dollar after sliding to a seven-week low of C$1.0497 on Oct. 30.

The rand declined versus the dollar for a second week as South Africa posted a trade deficit of 18.9 billion rand ($1.9 billion) in September. Economists in a Bloomberg survey forecast a gap of 16.4 billion rand.

The currency slid 3.6 percent to 10.1898 per dollar and touched 10.2174 yesterday, its lowest level since Sept. 6.

The 17-nation euro area’s annual inflation rate declined to 0.7 percent in October, the least since November 2009, from 1.1 percent in September, the European Union’s statistics office said Oct. 31. Unemployment in the region was at a record 12.2 percent in September, separate data showed.

Rate Bets

Bank of America Corp., UBS AG and Royal Bank of Scotland Group Plc forecast the ECB will cut rates at its meeting on Nov. 7. BNP Paribas SA, Societe Generale SA, JPMorgan Chase & Co. and Scotiabank predicted a reduction in December, when the central bank will publish new economic projections. The ECB last lowered its benchmark rate in May to a record 0.5 percent.

“The European recovery, which we always knew was a bit fragile, just looks that much weaker,” Richard Franulovich, the chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York, said yesterday in a phone interview. “There are quite a few people formally calling for the ECB to ease policy.”

The euro will test support between $1.3450 and $1.3570, Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London, said yesterday in a phone interview, referring to technical levels where there may be buy orders.

‘Underlying Strength’

The dollar rose this week versus most major peers after the Federal Open Market Committee on Oct. 30 cited “underlying strength” in the U.S. economy even as it maintained $85 billion in monthly bond buying to push down borrowing costs and spur growth. The purchases tend to debase the dollar.

The central bank unexpectedly refrained from slowing the purchases in September, saying it wanted more evidence of economic recovery. A Bloomberg survey last month forecast policy makers would start tapering the pace in March.

“The FOMC statement has challenged the market belief that the Fed would wait until 2014 before tapering,” Daragh Maher, a currency strategist at HSBC Holdings Plc based in London, said Oct. 31 in a phone interview.

The dollar extended gains yesterday as the Institute for Supply Management’s manufacturing index for October rose to 56.4, the highest since April 2011, weakening the case for the Fed to delay reducing stimulus. Readings above 50 signal growth. A Bloomberg survey forecast 55.

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