Euro Declines for Fifth Day as ECB Spurs Stimulus Speculation

  • Meeting minutes reopen possible policy divergence with Fed
  • European officials debated steps to counter global risks

Will Central Banks Deliver in March?

The euro extended its longest losing streak against the dollar in 10 months on speculation that the European Central Bank will expand stimulus at its meeting next month and add to policy divergence as the Federal Reserve considers when to next raise interest rates.

The common currency fell against most of its major peers after policy makers debated whether the risk of a global slowdown warranted pre-emptive monetary easing, according to an account of the ECB’s January meeting. The euro also weakened after U.S. reports on employment and business conditions boosted confidence in the world’s largest economy, adding to the case for the Fed to pare stimulus.

"The minutes served as a reminder to markets that the ECB is leaning towards action next month," said Bipan Rai, director of foreign-exchange strategy in Toronto at Canadian Imperial Bank of Commerce’s CIBC World Markets unit. They "point to the need for additional stimulus at the coming meeting to deal with the euro appreciation seen over the past few weeks."

Further ECB action may reignite bets on policy divergence that saw the euro plunge 22 percent against the dollar during the past two years. Before the five-day decline through Thursday, the shared currency had defied predictions for it to weaken in 2016 as investors cooled on the idea that the Fed would be able to raise interest rates while the ECB and other major counterparts eased monetary policy.

The euro dropped 0.2 percent to $1.1107 against the dollar as of 5 p.m. in New York. It fell 0.9 percent to 125.78 yen.

“The euro will continue to decline because the ECB has more ammunition" to carry out stimulus, Mark McCormick, head of North American foreign-exchange strategy at Toronto-Dominion Bank, said in an interview in New York. He sees the currency weakening to about $1.08 per euro in the next two months.

The number of Americans filing for unemployment benefits unexpectedly declined last week to a three-month low, signaling durability in the labor market. A measure of business sentiment contracted in February less than estimated, according to a separate report.

ECB policy makers meeting in January debated whether the risk of a global slowdown warranted pre-emptive monetary stimulus, and at least one Governing Council member saw a need to overshoot the central bank’s inflation goal for a “limited period.”

“The obvious question is whether or not the ECB can repeat its influence on the euro as we approach the key monetary policy meeting,” Derek Halpenny, the London-based head of European head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd., said in a note.

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