Euro Falls Most in Seven Weeks as Draghi Signals Easing in June

The euro fell the most versus the dollar in seven weeks as the European Central Bank signaled it will ease in June, halting a rally that had pushed the 18-nation currency to the strongest level since 2011.

Emerging-market currencies from South Africa’s rand to South Korea’s won rose against the dollar as Federal Reserve Chair Janet Yellen declined to provide a timeframe for raising interest rates. ECB President Mario Draghi said that policy makers would be “comfortable” with further stimulus next month. A Commerce Department report May 16 is forecast show housing starts increased 3.6 percent last month, a sign of how the U.S. economy is faring after harsh winter weather.

“This is the last time that Draghi can maintain credibility with verbal intervention, and so it’s really time for them to deliver,” Mark McCormick, a macro strategist at Credit Agricole SA in New York, said in a phone interview.

The euro fell 0.8 percent this week to $1.3758 in New York, the most since the five days ended March 21. It climbed May 8 to $1.3993, the strongest since Oct. 31, 2011.

Europe’s common tender dropped 1.2 percent to 140.13 yen. Japan’s currency rose 0.3 percent to 101.86 per dollar.

Euro Wagers

Futures traders increased bets that the euro will gain against the U.S. dollar as of May 6, before the May 8 ECB policy meeting. 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 32,551, the most since April 4 and compared with net longs of 25,734 a week earlier, figures from the Commodity Futures Trading Commission show.

Currencies of commodity producers and developing countries rallied in a sign that reduced forecasts for rising interest-rates in the U.S. are spurring demand for higher-yielding assets, known as the carry trade.

South Africa’s rand rallied 1.3 percent, the most of the dollar’s 16 major peers. Australia and Canada’s currencies gained 0.9 percent and 0.7 percent, while the South Korean won climbed 0.6 percent.

“The news has really been dominated by carry trade and higher-yielding currencies,” McCormick said. “What’s been interesting, at least in the dollar framework, is U.S. rates have decoupled from economic data.”

Market Timing

Yellen said this week that she believes the economy still requires a strong dose of stimulus. In March, she responded to a reporter’s question by saying the central bank’s benchmark rate might start to rise about six months after the Fed ends its asset purchases, a timeframe Yellen hasn’t repeated.

Two-year Treasuries yield 0.39 percent, down from a high this year of 0.47 percent. Yields on 10-year notes at 2.63 percent have declined from 3.1 percent.

Housing starts increased to 981,000 in April at an annual rate from 946,000 the previous month, according to the median forecast of economists in a Bloomberg survey.

The Labor Department reported May 2 employers added 288,000 jobs in April, the biggest increase since January 2012, and a drop in unemployment to 6.3 percent, the lowest level since September 2008. The report also showed the share of the working-age population either employed or seeking a job declined in April for the first time this year, pushing the participation rate to 62.8 percent, matching the lowest since March 1978.

Fed View

“I have some sympathy to the view that the Fed is making a mistake about how much slack there is in the labor market,” Steven Englander, managing director and Global Head of Group of 10 FX Strategy at Citigroup Inc. in New York, said May 8 in a telephone interview. “But you have to admit that the Fed seems utterly convinced that that slack is there, so until you find something that that refutes their view, I don’t think investors are going to be fighting that fight.”

In New Zealand, central bank Governor Graeme Wheeler warned May 7 that sustained strength in the local dollar while export prices are weakening would raise the odds of policy makers intervening in the currency markets.

The kiwi, as the currency is nicknamed, fell 0.6 percent to 86.13 U.S. cents.

“We have seen some weaker news out of the dairy industry in New Zealand,” said Eimear Daly, head of market analysis at Monex Europe Ltd. in London. “The moderation in housing activity shows there is now less immediacy on the central bank to act.”

The country became the first major developed nation to boost borrowing costs since 2011 when it lifted the key rate by a quarter-point to 2.75 percent on March 13, before raising it again to 3 percent last month as the economy gathered pace.

ECB Plans

Draghi said at a May 8 news conference in Brussels that “the Governing Council is comfortable with acting next time, but before we want to see the staff projections that will come out in the early June.”

Analysts at JPMorgan Chase & Co., UBS AG, Nordea Bank AB, Danske Bank A/S and UniCredit SpA also now predict the ECB will cut its benchmark interest rate from the current record-low 0.25 percent when it meets on June 5, according to research notes published following this week’s gathering.

“The low-inflation backdrop remains a key focus for the ECB,” Robert Lynch, a currency strategist at HSBC Holdings Plc in New York, wrote yesterday in a report. “Draghi spent a good deal of time at Thursday’s press conference discussing the euro’s impact on ‘too-low’ inflation, noting that the exchange rate is a ‘serious concern’ and that it will ‘have to be addressed.’”

The euro has gained 5.2 percent in the past 12 months, the third-best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar weakened 0.9 percent and the yen fell 2.2 percent.

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