BLBG:Euro Drops to Two-Month Low Before ECB Decision; Pound Weakens
The euro fell to a two-month low against the dollar before the European Central Bank announces its latest interest-rate decision after President Mario Draghi said yesterday the debt crisis is starting to hurt Germany.
The single currency weakened versus all but three of its 16 major peers after Market News International said the ECB was reluctant to start buying government bonds after a decline in borrowing costs. The yen strengthened as investors sought refuge assets amid concern re-elected U.S. President Barack Obama will struggle to avert the so-called fiscal cliff. The pound dropped to a two-week low against the dollar before the Bank of England’s policy decision.
The ECB story “could potentially be the catalyst this morning,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Draghi’s comments may have encouraged speculation that the ECB may present a more dovish stance at today’s meeting and open the door for further monetary easing, which would likely weigh upon the euro.”
The euro dropped 0.2 percent to $1.2742 at 11:20 a.m. London time after sliding to $1.2720, the lowest level since Sept. 7. The common currency fell 0.4 percent to 101.71 yen. The yen strengthened 0.2 percent to 79.82 per dollar.
The ECB is satisfied with the tranquilizing effect created by its plan to purchase government bonds, MNI reported today, citing unidentified European Union and central-bank officials.
ECB Decision
All but one of 63 economists surveyed by Bloomberg News forecast Europe’s central bank will keep its benchmark interest rate unchanged at 0.75 percent at today’s meeting.
“While a rate cut is unlikely, we should certainly expect some dovish commentary from ECB President Draghi at the post meeting press conference,” Ray Attrill, Sydney-based global co- head of currency strategy at National Australia Bank Ltd., wrote in a note to clients today.
Draghi said at a conference in Frankfurt yesterday that while Germany has been largely insulated from difficulties elsewhere in the euro area, “the latest data suggest that these developments are now starting to affect the German economy.”
German exports, adjusted for work days and seasonal changes, dropped 2.5 percent from August, when they gained 2.3 percent, the Federal Statistics Office said today. That’s the biggest slide since December. Economists forecast a 1.5 percent decline, according to the median of 16 estimates in a Bloomberg News survey.
Earnings forecasts released today by European Aeronautic, Defence & Space Co. (EAD) suggest it anticipates a stronger euro. Europe’s biggest aerospace and defense company said its new hedge contract had an average rate of $1.29 per euro.
Fiscal Cliff
The euro has declined 1.1 percent over the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen dropped 1.2 percent, while the dollar gained 0.9 percent.
“The biggest focus of the market as we head into year-end will be the fiscal cliff,” said Noriaki Murao, the New York- based managing director of the marketing group at the Bank of Tokyo-Mitsubishi UFJ Ltd., referring to the more-than $600 billion in tax increases and spending cuts set to be implemented in 2013 unless Congress acts. “Investors are buying safe currencies such as the dollar and yen.”
U.S. policy makers unveiled a plan in September to buy $40 billion of mortgage-backed securities every month in a third round of so-called quantitative easing after $2.3 trillion purchases of bonds from December 2008 and June 2011.
Dollar Index
The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against currencies of six U.S. trading partners, climbed 0.2 percent to 80.871, after rising to 81.001, the highest since Sept. 7.
The pound declined versus the U.S. currency as a Bloomberg News survey showed 35 out of 45 economists forecast the central bank will maintain its asset-purchase target at 375 billion pounds. Policy makers increased bond purchases, or so-called quantitative easing, by 50 billion pounds in July to stimulate growth in the U.K. economy.
“The majority of the market is not expecting anything from the Bank of England today given improvement in U.K. data and comments from policy makers,” said Peter Frank, global head of foreign-exchange strategy at Banco Bilbao Vizcaya Argentaria SA. (BBVA) “A slight sterling rally against the dollar and the euro would be the knee-jerk reaction to no change in policy, simply because a small section of the market is expecting more QE.”
The pound fell 0.2 percent to $1.5947 after declining to $1.5930, the weakest since Oct. 23. The U.K. currency was little changed at 79.92 pence per euro.
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
