Euro Soars Then Retreats as Draghi Says Policy Needs More Timeby
Shared currency follows post-ECB pattern of wide price swings
2016 gains remain even as central bank retains negative rates
For the third straight time this year, the European Central Bank’s policy statement and President Mario Draghi’s news conference sent the euro on a wild ride.
The shared currency soared and then erased gains as traders evaluated Draghi’s tone following the ECB’s latest meeting. Draghi said interest rates will remain at present or lower levels for an extended period of time and called on critics to give the bank’s stimulus program time to work.
“The initial knee-jerk reaction was that there were no additional stimulus, which is positive for the currency,” Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California, said in an e-mail. “However, the tone may suggest that any turn around is a long ways off. So the rally dissipated.”
The 19-nation currency has strengthened about 4 percent versus the dollar this year, even as the ECB has expanded bond-buying and extended negative interest rates. Policy makers in Europe and Japan are confronting the limits of their abilities to affect foreign-exchange rates as they seek to bolster economic growth and inflation.
The euro was little changed against the dollar at $1.1291 as of 8:28 a.m. on Friday in Tokyo. The currency was at 123.58 yen after falling for the first time in four days to 123.55 on Thursday. The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, was little changed after advancing 0.3 percent in New York.
The euro first rose as the central bank announced there would be no additional policy stimulus, gaining as much as 0.9 percent to reach a session high of $1.1398 during the news conference. It approached a six-month high versus the dollar as the ECB announced it would keep its asset-purchase program at 80 billion euros ($90 billion) a month. The common currency soon erased its gains, wiping out its biggest one-day advance in three weeks to fall as much as 0.2 percent.
The swings were more extreme in March when euro sank as much as 1.6 percent against the dollar after the central bank’s statements, only to reverse, rebounding to a gained of as much as 2 percent before closing up 1.6 percent on the day. After the central bank’s January meeting, the currency sank as far as 1 percent against the dollar, then recovered to end the day little changed.
Options prices show one-month implied volatility, a measure of anticipated price swings for the euro-dollar rate, fell to 7.7 percent, the lowest since December 2014, amid speculation there’ll be few major policy surprises this month from either the ECB or the Fed. It was 7.8 percent on Friday.
“The big issue for the euro is they offered nothing new,” Mark McCormick, North American head of foreign-exchange strategy in Toronto at Toronto Dominion Bank, said in an e-mail. “It’s really steady as she goes for now. It appears we are stuck to well-contained ranges,” he said.
The single currency is up 2.7 percent since the ECB decision on March 10, even after officials cut both the main refinancing rate and the deposit rate, and expanded bond purchases under quantitative easing. Its resilience is partly because the Federal Reserve has signaled it will take a gradual approach to policy tightening in the U.S.
“There’s not a lot of conviction at the moment in euro-dollar,” Stephen Gallo, head of European foreign-exchange strategy at BMO Capital Markets in London, said in an interview on Bloomberg TV. “For Mario Draghi, that’s a good thing. This means that he can allow market forces to do what they’ve been doing in the very near term, which is to insert a cap on top of the euro and provide support on the downside.”