Euro Faces Payrolls After Draghi Fueled Biggest Gain Since 2009

  • `The whole euro story changed a lot,' Commerzbank says
  • ECB cuts deposit rate 10 basis points, extends QE to March '17

The euro pared its biggest jump since 2009 against the dollar as investors awaited a U.S. payrolls report that will be a key input for the Federal Reserve as it considers tightening policy this month for the first time in almost a decade.

The single currency surged 3.1 percent Thursday as the additional stimulus measures announced by European Central Bank President Mario Draghi underwhelmed market expectations. After three months of declines in the currency, calls for a weaker euro were abandoned. Barclays Plc and Deutsche Bank AG both recommended closing positions that bet on further losses to the shared currency.

“The whole euro story changed a lot,” said Esther Reichelt, a strategist at Commerzbank AG, said from London. “Downside risks have decreased considerably because the ECB indicated yesterday that they will no longer weaken the euro further. The future path is largely dominated by the Fed policy. For further downwards move in euro-dollar the Fed has to exceed market expectations with respect to the rate path in 2016.”

The common currency fell 0.5 percent to $1.0884 as of 6:57 a.m. in New York from Thursday, when it soared to $1.0981, the strongest level since Nov. 3. It weakened 0.3 percent to 133.68 yen after jumping 2.5 percent the previous day.

The ECB increased planned stimulus by 360 billion euros ($392 billion) and cut the deposit rate by 10 basis points. Two-thirds of economists in a Bloomberg survey had predicted an increase in the pace of purchases.

Future gains in the euro won’t be substantial as the ECB’s policy is still very expansionary and if risks to the inflation outlook increase, the central bank will probably act further, Commerzbank’s Reichelt said. “We will see a lot of trial and possibly error in euro-dollar in the coming month with central banks and markets testing each other’s limits,” she said.

Euro’s Decline

The euro has slumped more than 10 percent against the dollar since the end of 2014 as the ECB introduced quantitative easing to revive the area’s economy, while the Fed has moved toward increasing interest rates. With these plans still in place, some strategists say the divergence between the central banks should still offer the dollar more support.

“What the ECB delivered wasn’t even half of what markets expected, providing an opportune time for those looking to unwind their euro-short positions,” said Daisuke Karakama, chief market economist at Mizuho Bank Ltd. in Tokyo. “For Draghi, it’s probably alright because the euro is in an environment to drift lower anyway as the Fed seeks to raise rates.”

A weaker currency is beneficial to European policy makers as they seek to spur a turnaround in the region, where quarterly growth has stayed below 1 percent since June 2010 and the annual inflation rate is stuck near zero.

Thursday’s decision disappointed euro bears who increased bets last month after ECB President Mario Draghi promised to “do what we must” to spur lackluster inflation. Hedge funds and other large speculators increased net wagers on a weaker euro to 175,484 contracts in the week to Nov. 24, the most since May, according to data from the Commodity Futures Trading Commission.

Yellen Testimony

In the U.S., Yellen signaled in congressional testimony Thursday that the economic conditions necessary for an interest-rate increase have been met. The jobs report on Friday will show American companies added 200,000 workers in November, compared with 271,000 the month before, according to the median estimate of analysts surveyed by Bloomberg.

Intercontinental Exchange Inc.’s U.S. Dollar Index, which tracks the greenback against six peers, rose 0.6 percent to 98.24. It tumbled 2.4 percent Thursday, the biggest decline since March 2009, after Fed Chair Janet Yellen emphasized the gradual path of U.S. interest-rate increases.

Futures indicate a 74 percent chance the Fed will raise its benchmark rate at the Dec. 15-16 meeting, data compiled by Bloomberg show. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase, compared with the current range of zero to 0.25 percent.

“The euro remains an attractive short versus the dollar,” said Todd Elmer, a Singapore-based strategist at Citigroup Inc. “While the ECB may have disappointed at its meeting, there is still likely to be widening in terms of policy divergence between the U.S. and Europe. Once we work through this position flush-out, I’d expect the euro to head lower again.”

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