Euro Extends Drop as Traders Seek Assets From Dollars to Stocksby
ECB stimulus last week seen boosting appetite for carry trades
Dollar supported as odds of December Fed rate increase jump
The euro fell for a second day against the dollar as traders rebuilt bets on a U.S. interest-rate increase and a rally in stocks encouraged them to do deals that involve borrowing and selling Europe’s shared currency.
The 19-nation currency is dropping from the highest level in almost a month, reached in the aftermath of the European Central Bank cutting interest rates and expanding quantitative easing on March 10.
While the euro initially tumbled on the decision, it rebounded after ECB President Mario Draghi said he didn’t see any need to cut borrowing costs further. The exchange rate is now falling again as the extra stimulus is seen supporting higher-yielding assets, stoking speculation the euro’s being used in so-called carry trades.
“Last week’s ECB monetary policy announcement finally made a case of rising appetite for risk assets,” Credit Agricole SA strategists led by Valentin Marinov, London-based head of Group-of-10 foreign-exchange strategy at the corporate and investment-banking unit, wrote in a note. “Due to its eroded rate advantage, the euro should remain a funding currency of choice, and that is likely to keep it closely and negatively correlated with risk appetite.”
The main driver of the exchange rate on Monday, though, was the dollar, which climbed against 13 of its 16 major peers.
While there’s only a 4 percent chance of the Federal Reserve raising borrowing costs when policy makers meet this week, the odds rise to 77 percent by the central bank’s December gathering, futures data compiled by Bloomberg show. A month ago, the probability of action by year-end stood at 11 percent.
The euro fell 0.4 percent to $1.1114 as of 7 a.m. New York time, after climbing to $1.1218 on Thursday, the highest level since Feb. 15. Even after the added stimulus, the European currency is still up 2.3 percent this year.