Euro Jumps Most in 3 Months as Market Shows Limits of ECB Policy

The euro jumped the most in three months against the dollar one day this week amid signs of limits to European Central Bank policies that would depreciate the exchange rate.

The U.S. currency gained against a basket of peers as an employment report matched forecasts, bolstering speculation that the Federal Reserve will keep reducing its month bond-buying. The currency market’s views on central bank stimulus drove a measure of volatility to the lowest ever. The yen weakened the most in seven weeks before Bank of Japan announces its next policy decision on June 13.

“The ECB is going to have to do more to convince the market that they should be selling euros,” said Steven Englander, the New York-based global head of Group of 10 foreign-exchange strategy at Citigroup Inc. “And in some ways it looks almost as if they don’t care.”

The euro fell 0.5 percent versus the dollar on June 5, the most since March 6, and finished the week little changed at $1.3643 in New York. The yen fell 0.7 percent this week to 102.48 per dollar, the biggest loss since the five days ended April 18. Japan’s currency dropped 0.8 percent to 139.80 per euro.

Dollar Trend

The Bloomberg Dollar Spot Index The gauge, which tracks the greenback against 10 major counterparts, climbed 0.2 percent to 1,012.80, and touched the highest level since April 4.

Hedge-fund managers and other large speculators added to bets the euro will weaken against the dollar to the most since July. The difference in the number of wagers on a decline in the common currency, compared with those on a rise -- so-called net shorts -- was 33,025 on June 3, compared with 16,633 a week earlier, according to data from the Commodity Futures Trading Commission.

JPMorgan Chase & Co.’s Global FX Volatility Index fell to 5.8 percent, less than the previous record of 5.9 percent in June 2007. That compares with 27 percent in October 2008, the highest ever, shortly after Lehman Brothers Holdings Inc. collapsed amid the worst financial crisis since the Great Depression.

Scandinavian currencies were the biggest winners of the week among 16 major peers, with Norway’s krone adding 0.5 percent against the dollar and the Swedish krona gaining 0.9 percent, the best performer. Sweden’s industrial production increased 3 percent in April, following a revised 3.6 percent decline the previous month, a report showed June 4.

Market Measure

The currency has lost 0.9 percent in the past month while Norway’s tender has advanced 0.9 percent, in a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 1.3 percent and the euro declined 1 percent.

The Canadian dollar fell 0.8 percent, the week’s biggest loser, after the nation’s unemployment rate unexpectedly rose last month, the first increase this year.

The ECB cut its deposit rate to minus 0.1 percent, becoming the first major central bank to take one of its main rates negative. In a bid to get credit flowing to parts of the economy that need it, policy makers also opened a 400 billion-euro ($546 billion) liquidity channel tied to bank lending, and officials will start work on an asset-purchase plan.

While conceding that rates are low, the ECB President Mario Draghi also signaled his willingness to act again.

ECB Policy

“If you look at the price action today, quite a few people were disappointed during the Q&A that there was no hint that actual broad-based asset purchases are coming later in the year,” Jens Nordvig, the New York-based managing director of currency research at Nomura Holdings Inc., said June 5 in an interview on Bloomberg Television’s “Street Smart” with Trish Regan.

The German DAX Index briefly surpassed 10,000 for the first time on June 5. The threshold was crossed after U.S. investors poured $142 million into an exchange-traded fund tracking German shares last month, reversing withdrawals that began in February. Italian bond yields fell to a record.

While cash inflows into European assets have boosted the euro, that result may be limited going forward, Nordvig said.

“That’s been the case over the last 12 months,” he said. “It’s going to be hard to see those flows accelerate further because they were strong already.”

Economic Outlook

The U.S. jobs report added to signs the economic recovery is picking up after gross domestic product shrank in the first quarter an annualized 1 percent amid harsh winter weather.

Nonfarm payrolls increased by 217,000 in May, versus 282,000 in April and a gain of 215,000 projected by economists in a Bloomberg survey. The unemployment rate held at 6.3 percent.

“The foreign-exchange market will focus on the short-term and largely as-expected data, equals low volatility, equals tactical foreign-exchange carry trades, equals slight negative dollar bias lives on, until squaring before the next employment report,” Alan Ruskin, the global head of Group of 10 foreign exchange at Deutsche Bank AG in New York, said in an e-mail.

The dollar will strengthen to $1.32 per euro and 107 yen by the end of the year, according to the median estimates in Bloomberg News surveys of analysts.

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