Euro Falls on Unexpected Interest-Rate Cut; Czech Koruna Tumbles

The euro fell the most in two years versus the dollar after the European Central Bank unexpectedly cut its main refinancing rate to a record-low 0.25 percent to boost growth in the 17-member currency region.

The Czech koruna dropped the most on record versus the euro as its central bank approved the first currency sales in more than a decade. The dollar extended gains as a report showed the world’s biggest economy expanded at a faster pace than forecast before tomorrow’s jobs report. The euro pared losses after a report said the Bundesbank president and at least two other officials opposed the rate cut, according to two central-bank officials. The yen gained on haven demand as stocks dropped.

“News after the press conference suggests the Bundesbank wasn’t behind today’s rate cut,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York, said in a phone interview. “That shows the vote wasn’t unanimous and one more potential rate cut can be pretty much ruled out.”

The euro fell 0.7 percent to $1.3419 at 5 p.m. New York time after slipping as much as 1.6 percent, the biggest drop since December 2011. It touched $1.3296, the weakest level since Sept. 16. The 17-nation shared currency slid 1.3 percent to 131.63 yen. Japan’s currency added 0.6 percent to 98.09 per dollar after dropping as much as 0.8 percent.

The Bloomberg U.S. Dollar Index climbed 0.4 percent to 1,017.12 after touching 1,022.30, highest since Sept. 13. It gained as much as 0.9 percent, the most since Aug. 1.

Koruna, Krone

The koruna tumbled as the Czech central bank began unlimited koruna sales “for as long as needed” to ease monetary policy and keep the exchange rate near 27 per euro after inflation slowed to the least in 3 1/2 years. Policy makers kept the benchmark interest rate at what they call a “technical zero” of 0.05 percent.

The Czech currency fell as much as 4.7 percent to close at 26.984 per euro, the biggest drop since the single currency was introduced in 1999.

Norway’s krone slid against all of its 16 major peers after a report showed manufacturing production fell 0.2 percent in September from a month earlier. The median estimate of economists surveyed by Bloomberg called for a 0.7 percent gain.

The krone weakened 1.5 percent to 6.0456 per dollar and slipped 0.8 percent against the euro to 8.1127.

The pound strengthened 0.8 percent to 83.37 pence per euro after appreciating to 83.01 pence, the strongest level since Jan. 17, as the Bank of England kept its key interest rate and bond-buying target unchanged, matching the forecast by all analysts surveyed by Bloomberg.

ECB Debate

The ECB’s decision was predicted only by analysts at Bank of America Corp., Royal Bank of Scotland Group Plc and UBS AG among 70 surveyed by Bloomberg News. The remaining 67 called for no change.

Bundesbank President Jens Weidmann and Governing Council members from countries traditionally aligned with the German central bank’s view wanted to wait until next month when forecasts and more data will be available before deciding, said the people who asked not to be identified because the talks are confidential.

Pledging to keep borrowing costs low for an “extended period,” Draghi said weakening price pressures justified the decision. Euro-area economic activity should “benefit from a gradual strengthening of demand for exports,” he said.

‘Growth Profile’

Exchange rates weren’t part of policy makers’ discussion, he said. The euro has strengthened 5.2 percent this year, the best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has advanced 3.2 percent and the yen has slumped 10 percent.

A report published Oct. 31 showed the region’s annual inflation rate unexpectedly fell to 0.7 percent last month, the least since November 2009.

The rate cut “fits into our view that the inflation and growth profile was going to push the ECB into more action relative to the Federal Reserve,” Ian Gordon, a New York-based foreign-exchange strategist at Bank of America Merrill Lynch, which correctly predicted the move, said in a phone interview. “That certainly creates an environment that the dollar will do well.”

The dollar extended gains as U.S. GDP grew at a 2.8 percent annualized rate in the third quarter, up from 2.5 percent in the previous three months, and more than the 2 percent median-estimate of economists surveyed by Bloomberg News, according to data released today.

‘Underlying Resilience’

A separate report showed fewer Americans filed applications for unemployment benefits last week, indicating firings haven’t picked up following the partial government shutdown in the first half of October. Jobless claims decreased by 9,000 to 336,000 in the week ended Nov. 2, from 345,000 in the prior period, the Labor Department said.

“The market will buy dollars on good news and disregard bad numbers,” said Richard Franulovich, the chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York. “Anything that looks weak will be discounted as an effect of the shutdown and solid numbers will be read as signs of underlying resilience in the economy.”

Nonfarm payrolls rose by 120,000 last month after a 148,000 gain in September, a separate Bloomberg survey indicated before the Labor Department data tomorrow.

Volume in over-the-counter foreign-exchange options on the euro-dollar exchange rate amounted to $17 billion today, the largest share of currency trades at 33 percent, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. The total was 104 percent more than the average trading for the pair for the past five Thursdays at a similar time.

Options on the dollar-yen rate totaled $10 billion, or 20 percent of the total, with trading in the pair 17 percent more than average. Total options trading was $51 billion today, from $38 billion yesterday.

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