Bloomberg News

Euro Drops to 1-Month Low on Outlook; Dollar Index Climbs

July 05, 2012

The euro slid to the lowest level in more than a month versus the dollar after European Central Bank President Mario Draghi said the currency bloc still faces risks after policy makers cut interest rates to a record low.

The shared currency weakened against all of its 16 most- traded peers except the Swiss franc and the Danish krone, dropping to the lowest against Australia’s dollar since 1999. The ECB cut its benchmark rate to 0.75 percent and reduced its deposit rate to zero for the first time. The Dollar Index jumped the most in almost eight months as reports showed U.S. labor- market improvement.

“The source of the weakness can be put down to Draghi’s comments,” Richard Franulovich, a New York-based senior currency strategist at Westpac Banking Corp., said in a telephone interview. “He didn’t really offer much in the way of fresh proposals. Not only was he non-committal, he was also pretty negative about these things happening again.”

The European currency fell against the dollar for a second day, dropping 1.1 percent to $1.2392 at 5 p.m. New York time and touching $1.2364, the weakest level since June 1. The common currency depreciated 1 percent to 99.03 yen. The greenback was little changed at 79.92 yen.

The euro slid to the lowest against the Aussie since the 17-nation currency was created in January 1999, A$1.2022, after Draghi’s comments. It rose earlier to A$1.2229. The Aussie gained 0.1 percent $1.0287 after rising earlier as much as 0.5 percent to $1.0329, the highest since May 3.

New Zealand’s dollar appreciated 0.5 percent to 80.76 U.S. cents before trading little changed at 80.35 cents.

China Cut

Both South Pacific currencies reached their highs of the day against the greenback after China cut its key interest rate for the second time in a month and the Bank of England raised the target in its asset-purchase stimulus program by 50 billion pounds ($78 billion) to 375 billion pounds.

The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the U.S. currency against those of six major trade partners, climbed as much as 1.4 percent, the biggest intraday jump since Nov. 9, to 82.950 after U.S. employment reports. It traded later at 82.793, up 1.2 percent.

ADP Employer Services, based in Roseland, New Jersey, said U.S. companies added 176,000 workers in June, beating a forecast in a Bloomberg News survey for a 100,000 advance. Applications for jobless benefits fell by 14,000 last week to 374,000, the fewest since mid-May, Labor Department data showed. The Labor Department will report tomorrow that U.S. payrolls added 100,000 jobs in June, another Bloomberg survey projected.

‘Downside Risks’

The euro tumbled against the dollar as Draghi said some “downside risks to the euro-area economic outlook have materialized.”

“Economic growth in the euro area continues to remain weak with heightened uncertainty,” Draghi said at a press conference in Frankfurt after the ECB cut its main refinancing rate by a quarter-percentage point and said it will no longer pay interest on overnight deposits.

The bank refrained from announcing any additional steps to cap debt yields in Spain and Italy, where borrowing costs have climbed amid concern Europe has yet to resolve its debt crisis. The yield on Spain’s 10-year debt rose as much as 43 basis points today, or 0.43 percentage point, to 6.84 percent, the highest since June 29.

Spurred Speculation

“All the ECB has managed to do this morning is increase speculation they’re going to move to further non-conventional measures later in the year,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank (TD)’s TD Securities unit, said in a telephone interview from Toronto. “The euro’s not emerging from this at all well.”

The cost for European banks to convert euro-denominated payment streams into dollar-based funding increased to the most in more than three months, according to a money-markets indicator. The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 0.67 percentage point below the euro interbank offered rate today, the most expensive since March 6. It was 0.4 percentage point below Euribor on May 4, the least this year.

“The rate cut today may not be the type of move that could actually solve any major problems in the euro zone,” Ravi Bharadwaj, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., said in a phone interview. “The markets are very well aware of this, and the sell-off in the euro seems to make sense because of that.”

Support Level

The shared currency’s move below its support level of $1.2409 indicates a resumption of a bearish pattern that began in May, MacNeil Curry, head of foreign-exchange and interest- rates technical strategy in New York at Bank of America Merrill Lynch, wrote in a note to clients today. The euro may fall to $1.2289 and lower if it sees a “sustained break” of the $1.2387 level, according to Curry.

Traders should buy the euro at current levels against the dollar, according to Lloyds Banking Group Plc, and bet the European currency will strengthen to $1.3241. They should end the trade if the euro falls to $1.2192, Tim McCullough, a technical strategist at Lloyds in London, wrote in a note today.

The euro dropped 3.2 percent over the past three months against nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes, tied with the Swiss franc for the worst performance. The greenback rose 3 percent and the yen gained 5.5 percent.

The Swiss franc depreciated against the dollar, weakening through 97 centimes for the first time in more than a month. Switzerland’s currency declined 1.1 percent to 96.94 centimes, after touching 97.16 centimes, the weakest level since June 1.

The pound fell for a fourth day against the greenback, declining 0.4 percent to $1.5525. It strengthened 0.7 percent to 79.81 pence per euro.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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