Euro Weakens for First Time in Four Days on ECB Speculation

  • Central-bank policy makers to announce decision on March 10
  • Euro-dollar implied volatility rises to most since 2015

The euro fell for the first time in four days on speculation the European Central Bank will increase currency-weakening stimulus when it meets this week.

Europe’s 19-member shared currency tumbled the most in a week against the dollar as nearly three-quarters of the economists in a Bloomberg survey predict the central bank will expand monthly bond purchases, and all but one see the deposit rate being cut further below zero.

“The pressure is on the euro because of the ECB,” said Georgette Boele, a currency strategist at ABN Amro Bank NV in Amsterdam. “We expect a package that will be a more aggressive rate cut and more quantitative easing,” which will probably depress the euro to $1.05 against the dollar by the end of June, she said.

The shared currency weakened toward a one-month low versus the dollar as the ECB stimulus projections contrast with Federal Reserve plans to raise interest rates again this year. With negative yields on sovereign debt spreading across Europe, futures prices show nearly a three-quarters likelihood the U.S. central bank will move rates higher, bolstering the allure of dollar-denominated assets.

The euro dropped 0.5 percent to $1.0954 as of 9:31 a.m. New York time. The shared currency weakened 0.7 percent to 124.35 yen. The dollar depreciated 0.2 percent to 113.57 yen.

“You have the ECB policy, which is generally going to be cutting rates, expanding QE, and that tends to weaken the euro,” Richard Cochinos, London-based head of Europe Group-of-10 currency strategy at Citigroup Inc., said in an interview on Bloomberg Television. The world’s biggest foreign-exchange trader sees the euro “trading below $1.05 and towards parity by year-end, but the path there is neither straight nor direct and the ECB is important.”

Market Forces

The euro is the worst-performing major currency versus the dollar after the pound during the past month. Also undermining the euro are investor concern that regional growth slows amid a growing refugee crisis and political uncertainty in Spain and Ireland.

Traders are struggling to shake off the memory of the ECB’s Dec. 3 stimulus extension, which underwhelmed markets and sparked the common currency’s biggest one-day increase since 2009. Traders’ expectations over the next week for price swings in the euro climbed to a three-month high, reaching 16.03 percent, the most since Dec. 2 on a closing basis.

The euro may also be set for declines after it failed to break through its 200-day moving average of $1.1047 on March 4, according to Morgan Stanley.

“Failure to develop a daily closing price above $1.10 today suggests to us that a corrective high has been traded, opening renewed downside potential,” Hans Redeker, global head of currency strategy at Morgan Stanley in London, wrote in an e-mailed note.

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