Dollar Gains on Tax Reform Outlook; Euro Sinks on ECB Tapering

Updated on
  • Reinvestment of maturities to be sizable; ‘no sudden stop’
  • Dollar also supported by report Yellen out of Fed race

Draghi Says Recalibration of QE Reflects Confidence

The euro fell to the lowest since late July after the European Central Bank said it would extend its asset purchase program at a lower rate. The dollar rallied to its highest since July 12 after the U.S. House passed a budget resolution seen as advancing the prospects for tax reform.

The Bloomberg Dollar Spot Index gained 0.7 percent, and the greenback advanced versus all of its G-10 peers. In contrast, the euro dropped against eight of the same group, falling to 1.1650. The ECB will extend its bond purchases until at least September 2018 at a pace of 30 billion euros per month, broadly in line with expectations. The House resolution narrowly passed amid various contentious issues. A key lawmaker said a tax bill will be released by Nov. 1.

  • The Bloomberg Dollar Spot Index resumed its weekly rise Thursday, climbing the most in five weeks. The dollar was also supported by a Politico report saying Fed Chair Yellen was out of the running for reappointment, implying the possibility of a more hawkish nominee. The report cited an unnamed source who also said the choice is between Jerome Powell and John Taylor. Another Politico source said Trump changes his opinion on the issue every day, so it can’t be assumed the two men are the only possible candidates
  • The euro suffered amid the ECB decision as traders had been biased for a more hawkish outcome. ECB President Draghi emphasized the commitment to an “open-ended program” that will “not stop suddenly,” and ECB Vice President Constancio stressed that the bank will reinvest proceeds from monthly maturities, an amount that will be “sizable” 
    • The ECB said that risks to the economic outlook are broadly balanced, though it reiterated that FX effects remain one of the downside risks. Still, the bank could halt QE by the end of next year if the inflation outlook improves, officials with knowledge of the discussions said
  • EUR/USD was trading around 1.1651 in the New York afternoon, lower by more than 1 percent and near the lowest since July 27. The pair fell below its 100-DMA, at 1.1674, for the first time since April. EUR has given up about half of the gains seen since Draghi’s Sintra speech in late June, when he first broached the tapering topic. A sustained breach of the 100-DMA may open discussion of targets around the June lows ~1.1120 seen before the Sintra remarks
    • EUR/USD option trading accounted for almost one-third of Thursday’s DTCC volume
  • USD/JPY was trading near 113.95 vs a session high at 114.04 as the yen outperformed other peers against the dollar. JPY might still be feeling the effect of cross-trade unwinds seen Wednesday, as commodity and EMFX declined on local considerations. USD gains were hampered by unwinds of EUR/JPY longs as that cross fell the most in a month, a trader in New York said
  • Scandies, the loonie and EMFX all fell sharply; USD/CAD saw its biggest two-day advance since the end of February, extending gains after the BOC on Wednesday said it would be cautious about further rate hikes
    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE