Euro Falls Versus High-Yield Currencies on Carry Boost

The euro weakened against its higher-yielding peers as the European Central Bank’s commitment to its package of stimulus measures boosted demand for currencies including Malaysia’s ringgit and South Africa’s rand.

The shared currency fell versus all except two of its 31 major counterparts as ECB Governing Council member Ewald Nowotny said inflation was “massively” below the central bank’s target. The dollar headed for its biggest weekly gain since April versus the yen before a U.S. report that economists said will point to a labor-market recovery. The Philippine peso advanced after data showed inflation quickened, stoking speculation that policy makers will raise interest rates. Norway’s krone gained.

“If you have a central bank that’s moving toward more easing like the ECB it just gives another green light toward the high-yield market,” said Jane Foley, a senior currency strategist at Rabobank International in London. “If we look back at what huge amounts of easing from various central banks have done in recent years it has promoted asset-price inflation and confidence into high-yield markets.”

The euro fell 0.2 percent to $1.3639 at 8:01 a.m. New York time after climbing 0.5 percent yesterday. The 18-nation common currency declined 0.2 percent to 139.63 yen, halting six days of advances. The dollar was little changed at 102.36 yen, set for a 0.6 percent gain this week.

The euro depreciated 0.3 percent to 4.3802 ringgit and dropped 0.4 percent to 14.5408 rand.

Carry Trades

Currency dealers often use a strategy known as carry trades that exploit differences in global interest rates to generate profits.

The ECB became the first major central bank to charge fees on deposits and unveiled other plans to support an economy threatened by deflation yesterday. Policy makers led by President Mario Draghi cut their deposit rate to minus 0.1 percent, lowered the key interest rate to a record 0.15 percent and announced a number of measures including targeted long-term loans.

“The ECB measures could boost risk appetite and demand for carry,” said Valentin Marinov, head of European Group of 10 currency strategy at Citigroup Inc. in London. “Negative deposit rates will force banks to spend their excess cash. Presumably part of that will go into risk-correlated, higher yielding assets like stocks or high-yielding currencies. The euro has become more-attractive funding currency for carry trades.”

Good News

The measures are good news for Europe’s risky assets, particularly peripheral ones, and portfolio and net direct investment inflows into the region are likely to continue, Thomas Kressin, head of European foreign exchange at Pacific Investment Management Co. in Munich, said yesterday.

Euro-area government bonds rose today with yields on Spanish and Italian securities dropping to record lows, while the Stoxx Europe 600 Index of shares advanced for a third day.

Euro volatility dropped to the lowest since May 30 after it surged to the highest level in a year yesterday before the ECB announcements.

Implied volatility on one-day options on the euro-dollar exchange rate fell to 5.50 percent. It reached 22.1 percent yesterday, the most since February 2013.

JPMorgan Chase & Co.’s volatility index for the currencies of the Group of Seven nations fell to 5.82 percentage points, the lowest level since June 2007.

Payrolls Data

The U.S. economy added 215,000 jobs last month after a 288,000 gain in April, the Labor Department will say today, according to the median forecast in a Bloomberg News survey. Fewer Americans filed applications for jobless benefits during the past month than at any time since June 2007, data showed yesterday. The four-week average for jobless claims fell to 310,250 in the period ended May 31, the Labor Department said.

“The U.S. economy is still on a smooth recovery path, and the payrolls data should support that view,” said Yuki Sakasai, a currency strategist in New York at Barclays Plc. “Payrolls will be much more important for determining dollar-yen direction than the ECB decision was.”

The Federal Reserve is cutting back on bond purchases it has used to keep borrowing costs low amid signs the economy is improving. Policy makers have kept the benchmark interest rate at a record zero to 0.25 percent since December 2008.

The krone strengthened against the euro even as a report from Statistics Norway in Oslo showed industrial production declined 0.1 percent in April, following a revised 2.1 percent increase the previous month.

The currency appreciated 0.4 percent to 8.1463 per euro, the biggest gain since May 16. It climbed 0.3 percent to 5.9691 per dollar.

Peso Gains

The peso advanced as HSBC Holdings Plc and Barclays Plc forecast Bangko Sentral ng Pilipinas will increase the benchmark policy rate at its June 19 meeting after data yesterday showed the gain in the consumer price index in May was the fastest since 2011.

“The stronger-than-expected CPI data helped push the peso higher on the view that rate hikes may be coming,” said Jonathan Cavenagh, a foreign-exchange strategist at Westpac Banking Corp. in Singapore. The central bank may allow more currency strength, he said.

The peso appreciated 0.4 percent to 43.65 per dollar and was up 0.2 percent for the week, prices from Tullett Prebon Plc show.

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