BLBG: Euro Declines Most in Three Months on Shift to Policy Divergence
The euro is falling victim to monetary policy divergence again.
The 19-nation currency weakened the most in three months against the dollar on speculation the European Central Bank will maintain its bond buying, while the Federal Reserve moves closer to raising interest rates. The euro slid versus most of its major peers while stocks and peripheral bonds rose on speculation that Greece will soon clinch a deal to avoid default, increasing the euro’s appeal as a funding currency.
“The ECB is expected to continue its aggressive monetary policy,” Georgette Boele, a currency strategist at ABN Amro Bank NV, said by phone from Amsterdam. “The dollar is profiting from that. When sentiment is better, people get a bit more optimistic about the U.S.”
She said she expects the euro to drop to as low as 95 cents in the third or fourth quarter.
The euro fell 1.3 percent to $1.1189 at 11:18 a.m. New York time and declined 1 percent to 138.52 yen. The dollar rose 0.4 percent to 123.81 yen.
The ECB began a 1.1 trillion euro ($1.23 trillion) bond-buying plan this year to spark inflation and economic growth. The Fed is monitoring economic data as policy makers consider timing for their first interest-rate increase since 2006.
Policy Divergence
Treasury 10-year notes yield almost 1 percentage point more than the average of Group of Seven peers, touching the most since May 20, according to data compile by Bloomberg.
“The view in the market is that policy divergence between Europe and the U.S. will continue,” said Richard Falkenhall, a trading strategist at SEB AB in Stockholm. “Whether or not Greece has a deal, the ECB may have to step up its quantitative-easing program, weakening the euro. We maintain our view that the Fed will start tightening in the second half of the year, and expect the euro to trade towards parity by year-end.”
European leaders gave Greek Prime Minister Alexis Tsipras’s government 48 hours to make a final effort to satisfy creditors and end a five-month standoff. Leaders from Greece’s 18 fellow euro-area countries agreed to step up the pace of negotiations to secure a breakthrough on Wednesday that leaders can sign at the end of the week.
The euro moving in the opposite direction as higher-yielding assets suggested the euro is seen by investors as a “quasi-safe haven,” according to Jane Foley, a senior currency strategist at Rabobank International in London.
“It follows that once risk appetite is restored that investors will again take advantage of the low interest rates that are prevalent through much of the euro zone and use the euro to fund riskier trades in higher-yielding assets,” Foley wrote in an e-mailed note.
The euro has slumped 4.4 percent this year, the worst performer after New Zealand’s dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.
