Euro Falls to 5-Week Low as German Confidence Drops; Ruble Gains

The euro fell to a five-week low versus the dollar after a gauge of German investor confidence declined for a fifth month, fueling speculation the European Central Bank will take measures to boost the region’s economy.

The U.S. currency strengthened for a third day against a basket of major peers as an upward revision in March retail sales offset concern that the April gain that trailed forecasts signaled a slowing economy. Russia’s ruble headed for a three-month high on bets Western nations won’t rush to impose tougher sanctions. A measure of volatility rose from a 2007 low.

“The weakness in euro won’t sustain unless the ECB comes in with aggressive easing that’ll lead to the expansion of balance sheets,” Sireen Harajli, a strategist at Mizuho Bank Ltd. in New York, said in a phone interview. “The year-on-year retail sales really isn’t that bad. That gave a little bit of support for dollar-yen.”

The euro fell 0.4 percent to $1.3704 at 5:02 p.m. New York time after declining to $1.3689, the least since April 4. The dollar rose 0.1 percent to 102.27 yen after reaching 102.36, the highest level since May 2. Japan’s currency strengthened 0.3 percent to 140.13 per euro.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, climbed 0.2 percent to 1,010.06, and reached the highest level since May 2.

Market Measure

JPMorgan Chase & Co.’s Global FX Volatility Index rose for a third day to 6.41 percent. It fell to 6.21 percent on May 9, the lowest level since 2007.

The greenback has lost 1 percent this year, the third-worst performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro dropped 1.4 percent and the yen added 2.2 percent.

South Africa’s rand rose 0.5 percent to 10.3089 per dollar, and reached the strongest in five months after Moody’s Investors Service said the African National Congress’s decisive win in the general election is “credit positive”.

While the European Union expanded its sanctions list yesterday, EU and U.S. policy makers say they are concerned broad sanctions on the country’s energy and financial sectors risk provoking retaliatory measures from Russia. The ruble strengthened 0.8 percent to 40.6913 against the central bank’s target dollar-euro basket.

Economic Look

The dollar retreated against the yen as retail sales climbed 0.1 percent last month, following a revised 1.5 percent surge in March that was the biggest since March 2010, Commerce Department figures showed. The median forecast of 83 economists surveyed by Bloomberg called for a 0.4 percent advance.

The 18-nation currency weakened versus most of its 16 major counterparts after the Wall Street Journal reported that Germany’s Bundesbank is willing to back stimulus measures from the ECB next month if staff forecasts show a lower 2016 inflation outlook.

The ZEW Center for European Economic Research in Mannheim said its index of German investor and analyst expectations, which aims to predict the nation’s economic developments six months in advance, slid to 33.1 in May from 43.2 in April. The gauge is at the lowest level since January 2013. Economists forecast a decline to 40, according to the median of 33 estimates in a Bloomberg News survey.

ECB President Mario Draghi signaled last week he may add monetary stimulus in June because policy makers are “dissatisfied” with the inflation outlook, in part due to an increase in the exchange rate.

ECB Watch

“Interest-rate cuts are the most likely for the ECB, but we’re not convinced it’ll trigger a sustained downtrend for the euro,” said Brian Daingerfield, currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut.

While nominal yields of European countries’ bonds have fallen in recent months, the interest-rate when adjusted for inflation, known as the real yield, signals there may be continued demand for those assets, said Marc Chandler, an analyst in New York at Brown Brothers Harriman & Co.

Treasuries due in 10 years yield about 0.93 percent when adjusted for forecast inflation, as measured by a Bloomberg survey. That compares with 0.14 percent for government securities in Germany, 2.6 percent for Spain, 2.24 percent for Italy and 3.3 percent for Portugal, according to data compiled by Bloomberg.

“One of the reasons the euro has been strong is that people have been buying peripheral bonds,” Chandler said in a telephone interview. “If the real rates are still high, then maybe this rally in European bonds and in the euro may have greater legs.”

Yuan Rises

China’s yuan climbed, reversing earlier losses, on speculation policy makers will roll out stimulus to support growth after economic data missed forecasts.

Industrial production rose 8.7 percent in April from a year earlier, compared with the 8.9 percent median estimate in a Bloomberg survey, official data showed today. China’s central government will adopt a series of economic stimulus measures in the near future, Netease reported on its website, citing a person familiar with the matter that it didn’t identify.

The yuan rose 0.13 percent to 6.2291 per dollar. It fell as much as 0.08 percent earlier as the People’s Bank of China set the reference rate 0.02 percent weaker at an eight-month low of 6.1636.

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