BLBG:Euro Rallies on Prospects ECB to Hold; Dollar Drops
The euro rose against the dollar and the yen as a gauge of the region’s services output rose more than initially estimated, boosting speculation the European Central Bank will refrain from cutting interest rates tomorrow.
The dollar fell from near a seven-week high before data tomorrow that analysts said will show gross domestic product growth slowed last quarter and as two Federal Reserve research papers said the level of slack in the economy justified an accommodative stance. New Zealand’s currency climbed to a two-week high as employers added more jobs than analysts forecast. French and German services output grew more than initially estimated, the regional purchasing managers indexes showed.
“The euro has perhaps been helped a little bit by the PMI numbers coming in a little bit better than expected,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce. “Investors are mindful of event risk, partially related to the ECB but partly related to U.S. GDP and non-farm payrolls. That over-arching backdrop has caused the dollar to lose a little bit of ground.”
The euro strengthened 0.4 percent to $1.3522 at 11:09 a.m. London time after declining to $1.3442 on Nov. 4, the weakest level since Sept. 18. The common currency rose 0.5 percent to 133.36 yen. The dollar was little changed at 98.61 yen.
The euro-area index of the services industry was at 51.6 last month, London-based Markit Economics said today, exceeding its initial estimate of 50.9. The gauge has been above 50, indicating expansion, for three months. The 17-nation currency extended its advance as a report showed German factory orders increased more than economists estimated in September.
‘Important Support’
The ECB will leave its main refinancing rate at 0.5 percent tomorrow, according to 67 of 70 economists surveyed by Bloomberg News. Bank of America Corp., Royal Bank of Scotland Group Plc and UBS AG predict the ECB will reduce borrowing costs by 25 basis points to a record.
The euro has held “important support” around $1.3475 to $1.3545, which contains the lows from late September and early October, according to JPMorgan Chase & Co.
“This area will define whether a deeper extension is under way,” Niall O’Connor, a technical analyst at JPMorgan in New York, wrote in a research note.
The euro strengthened 5.4 percent this year, the best performer of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar advanced 2.7 percent and the yen slumped 11 percent.
Fed Stimulus
The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major currencies, dropped 0.3 percent today to 1,013.32 after rising to 1,017 on Nov. 4, the highest since Sept. 18. The yen slid as Japan’s Topix Index of shares rose 0.8 percent, damping demand for the currency as a haven.
U.S. gross domestic product grew at a 2 percent annualized rate in the third quarter, down from 2.5 percent in the previous three months, according to a Bloomberg survey before the data is released tomorrow.
San Francisco Fed President John Williams said yesterday economic growth in recent months had fallen short of his expectations, partially eroding his confidence that gains in the labor market will endure without monetary stimulus.
The Fed’s policy of seeking to drive down the U.S. unemployment rate is effective, according to two separate papers by top Fed officials posted on the International Monetary Fund’s website.
Unemployment Threshold
William English, head of the Division of Monetary Affairs, wrote that the strategy of not raising interest rates if unemployment is above 6.5 percent had provided effective stimulus, and that an even lower threshold could be helpful. A paper by David Wilcox, the research and statistics chief, said that slack in the economy argued for loose policy at a time of contained expectations for inflation.
“The dollar’s trading slightly weaker as there’s more focus on a couple of recent Fed studies that suggest it may be more effective for the Fed to lower the unemployment threshold going forward,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “That’s leading to a more dovish price action for the dollar in the near term.”
The kiwi strengthened for a fourth day versus the dollar after Statistics New Zealand said employment in the nation rose 1.2 percent in the third quarter, compared with a 0.4 percent gain in the previous three months.
“The labor-market statistics were very positive and another indicator suggesting that the Reserve Bank of New Zealand will need to raise interest rates, probably in the first half of next year,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “With rate-hike expectations rising up again, the kiwi has been dragged higher.”
The New Zealand currency climbed 0.4 percent to 84.01 U.S. cents after advancing to 84.15 cents, the highest level since Oct. 24.
To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Kevin Buckland in Tokyo at kbuckland1@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
