BLBG:Euro Set for Weekly Drop, Dollar for Gain as Spending Cuts Begin
The euro was poised for its longest stretch of weekly declines since June on prospects for lower interest rates in the region with data today forecast to confirm a manufacturing contraction worsened.
Europe’s common currency fell in February, snapping six months of gains, as European Central Bank President Mario Draghi said this week the bank is “far” from exiting stimulus measures. The region’s inflation slowed in February, a report today is forecast to show, opening the door for more easing. The dollar and yen were set for weekly advances against most major peers amid concern automatic spending cuts in the U.S. will damp global growth, boosting demand for refuge assets.
“Everyone thought that Europe was saved, but looking at the data of late, things aren’t looking that great,” said Richard Breen, a Sydney-based senior consultant at Rochford Capital, a currency and interest-rate risk management company. “Weak manufacturing data there is going to continue to put pressure on the euro.”
The euro rose 0.2 percent to $1.3076 as of 1:14 p.m. in Tokyo and has declined 0.9 percent this week. It gained 0.3 percent to 121.15 yen, set for a 1.7 percent drop since Feb. 22. The yen fell 0.1 percent to 92.66 per dollar compared to 92.56 yesterday and 93.42 last week.
The 17-nation euro slid against 14 of its 16 major peers in February, losing 3.8 percent against the greenback and 3 percent against the yen. The dollar rose 0.9 percent versus the yen last month, a fifth monthly gain, the longest winning streak since August 2008.
European Manufacturing
An index based on a survey of purchasing managers in manufacturing in the 17-nation euro bloc fell to 47.8 in February, from 47.9 in January, London-based Markit Economics is forecast to say in a final reading, according to the median estimate of economists surveyed by Bloomberg News. Levels below 50 indicate contraction.
Draghi signaled at an event in Munich on Feb. 27 that the central bank has no intention of tightening monetary policy anytime soon, with inflation projected to “significantly” undershoot its 2 percent target next year.
The euro-area inflation rate slowed for a second month to 1.9 percent in February, according to a separate Bloomberg poll of analysts before today’s report. of analysts before today’s report. The ECB will probably maintain its benchmark interest rate at 0.75 percent next week, according to a Bloomberg survey.
Italian Election
The euro pared its weekly decline amid prospects for a resolution to the political deadlock in Italy after last weekend’s inconclusive elections.
The country is headed for a broad coalition government as bondholders pressure Pier Luigi Bersani and Silvio Berlusconi to set aside their rivalries and form a partnership, said Finance Undersecretary Gianfranco Polillo in an interview yesterday.
“A likely grand coalition to be formed in the next few weeks will limit the downside,” Barclays Bank Plc strategists led by Michael Gavin, wrote in a report yesterday.
Investors may seek the safety of haven currencies such as the dollar as spending cuts in the U.S., known as sequestration, take effect, Rochford’s Breen said.
No additional U.S. congressional action is planned before the start of the cuts today, to be split between defense and non-defense spending. The across-the-board reductions will total $1.2 trillion over nine years, with $85 billion set to take effect in the remaining seven months of this fiscal year.
The sequestration issue “combined with what’s going on in Europe, will certainly make the market shy away from risk trades for the time being,” said Jim Vrondas, the Sydney-based chief currency and payment strategist at international money transfer service OzForex Ltd.
Chinese Manufacturing
The Australian dollar dipped briefly after two indexes of Chinese manufacturing indicated a slower-than-expected pace of expansion. The Purchasing Managers’ Index fell to 50.1 in February, the lowest since September, official data showed. The median estimate of economists surveyed by Bloomberg News was 50.5.
A separate gauge from HSBC Holdings Plc and Markit Economics dropped to a four-month low of 50.4 from 52.3. Readings above 50 indicate expansion.
The Australian dollar slid as much as 0.1 percent before rising 0.1 percent to $1.0229 from yesterday’s close. It’s set for a 0.9 percent decline against the greenback this week.
“The manufacturing PMI data came in on the soft side of expectations and we’ve seen the Aussie dollar drift off a little,” Vrondas said, adding that the currency is likely to test the $1.0180 level and will find support toward $1.0150.
To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Kevin Buckland in Tokyo at kbuckland1@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
