Euro Falls as Traders See Signs of Revitalized Divergence Trade

  • Investors await accounts of central banks' recent meetings
  • Credit Agricole's Marinov expects dovish ECB, hawkish Fed

The euro fell against the dollar as investors awaited accounts of the European Central Bank and Federal Reserve’s latest policy meetings, which they’ll scour for evidence the divergence trade will regain traction.

The 19-nation euro posted its biggest gain in five years last quarter even as the ECB unveiled stimulus measures to spur the economy. That’s because signs from the U.S. of a slower pace of interest-rate increases have undermined the dollar. Speculation is building that the minutes of the Fed’s March meeting, due later Wednesday, and the ECB’s release Thursday will reassert the policy divergence that bolstered the dollar previously.

Europe’s single currency also weakened after International Monetary Fund Managing Director Christine Lagarde said over the weekend that the organization is still “a good distance away” from agreeing on loans to Greece. In a speech in Frankfurt on Tuesday, Lagarde highlighted risks to the global economy, which may make it more likely the ECB will introduce fresh stimulus.

“Investors are awaiting the release of both minutes for a final verdict on the fate of the currency decoupling trade,” said Valentin Marinov, head of Group-of-10 currency research at Credit Agricole SA’s corporate and investment-banking unit in London. “The Fed minutes will be more hawkish than recent statements, whereas the ECB minutes will signal greater willingness to do more. The euro should struggle to perform given the risks ahead -- Greece as well as a lingering global growth slowdown.”

Quarterly Gain

The euro fell 0.3 percent to $1.1344 as of 8:40 a.m. in New York, after gaining 4.8 percent in the first quarter and reaching a five-month high of $1.1438 on April 1. It dropped 0.3 percent to 125.22 yen, while Japan’s currency was little changed at 110.39 per dollar.

Monetary stimulus tends to weaken a currency by increasing the money supply, while higher interest rates make a currency more attractive for an investor to hold.

ECB Executive Board member Peter Praet said this week the central bank will keep acting “forcefully,” as needed, to counter the risk of slow inflation becoming entrenched. Fed officials, on the other hand, still forecast two rate increases in 2016, even as slow growth at home and abroad threaten their efforts to tighten policy after their first hike in almost a decade in December.

Societe Generale SA, which predicts one Fed rate increase this year, expects the euro to weaken to $1.05 by year-end as policy divergence reasserts itself.

“The dollar has suffered from the lack of growth acceleration and the Fed’s re-re-rethink, but there’s a lack of interesting alternatives, at least among the G-10 currencies,” said Kit Juckes, a global strategist at SocGen in London. “The Fed is still likely to tighten before others and so the dollar rally seems more stalled than stopped.”

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