Euro Slumps as Draghi Says He's Ready to Lift Stimulus If Needed

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  • ECB cuts inflation forecasts, raises cap on bond purchases
  • Central banker says QE may run beyond September 2016

Is Draghi's ECB QE Reset Enough to Help Europe?

The euro fell to a two-week low as the European Central Bank signaled its willingness to increase stimulus to counter slower growth and inflation.

The shared currency weakened versus all of its 16 major counterparts after policy makers cut economic forecasts and raised the limit on bond purchases per issue under their quantitative-easing program. ECB President Mario Draghi said at a press conference in Frankfurt on Thursday that officials are willing, ready and able to act.

“Every facet of what he had to say was very dovish,” said Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York. “It was really that reference to tweaking the forward guidance, expanding the issue limits and willingness to do more that was the euro’s problem. That’s what hit euro today.”

The euro dropped 0.9 percent to $1.1123 at 5 p.m. New York time and touched $1.1087, its weakest since Aug. 19. It dropped 1.1 percent to 133.56 yen.

Rally Over

The shared currency is on pace to fall for a second straight week, resuming declines from earlier in the year when the central bank announced its bond-buying plan in January and began purchases in March.

Last month, falling oil prices and concern that China’s economy is weakening boosted demand for the common currency as a haven, while some traders unwound carry trades that involved investing in higher-yielding assets abroad.

With Draghi reasserting the ECB’s commitment to monetary easing “until the end of September 2016, or beyond, if necessary,” the recent gains are fading. Monetary stimulus tends to weigh on exchange rates.

Dovish Surprise

“The market will be looking for additional action down the road,” said Steven Englander, global head of Group-of-10 currency strategy at Citigroup Inc. in New York. “The ECB would like the euro weaker.”

A weaker currency would assist the central bank as it promotes exports and boosts potential inflation by raising prices on imported goods. 

The ECB cut its outlook for inflation and growth through 2017 on Thursday. Officials see consumer prices barely growing this year, with negative readings possible, Draghi said.

“If the situation continues to deteriorate, then the hurdle for further easing has been lowered,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi in London. The euro may fall to $1.10 in the short term and reach parity over the next 12 months, Hardman said.