Bloomberg News

Euro Weakens as ECB Reduces Economic Forecasts

December 06, 2012

The euro declined the most in a month against the dollar after European Central Bank President Mario Draghi said economic weakness will persist next year, suggesting the central bank has scope to lower interest rates.

The 17-nation currency dropped from almost a seven-month high against the yen after the ECB cut its growth forecasts and said it saw “downside risks” for the region. The yen strengthened versus most of its major counterparts as investors sought safer assets. New Zealand’s dollar rose to a two-month high against the greenback after the nation’s Reserve Bank said growth was likely to quicken.

“They gave a bad prognosis into next year, and it looks like the air is coming out of the balloon,” Matthew Lifson, senior trader at Cambridge Mercantile Group in Princeton, New Jersey. “I didn’t necessarily think we were going to drop as hard as we did.”

The euro depreciated 0.8 percent to $1.2970 per dollar at 5:02 p.m. in New York, after falling 0.2 percent yesterday. The common currency dropped 0.9 percent to 106.84 yen, after rising to 107.96 yesterday, the strongest level since April 20. The yen gained 0.1 percent to 82.40 per dollar.

Rand Rises

The rand advanced to the strongest level in more than three weeks, erasing an earlier decline, after South Africa’s current- account deficit stayed unchanged in the third quarter.

The currency climbed 1 percent to 8.6800 a dollar, the strongest since Nov. 8.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against currencies of six U.S. trading partners, rose 0.6 percent to 80.246. Yesterday it slid to the lowest since Oct. 23.

The damage wrought by Hurricane Sandy probably extended to the job market in November as the storm forced businesses to close, upending the recent pickup in U.S. hiring, economists projected a report this week will show.

Payrolls rose by 85,000 workers last month, the smallest gain since June, according to the median forecast of 91 economists surveyed by Bloomberg ahead of Labor Department figures Dec. 7. Manufacturing and services grew at a slower pace, other reports may show.

ECB View

Draghi said the ECB forecasts that economy will shrink 0.5 percent this year, more than the 0.4 percent contraction it predicted in September. The ECB cut its 2013 forecast to a contraction of 0.3 percent from 0.5 percent growth, and projects expansion of 1 percent in 2014, he said.

“Weak activity is expected to extend into next year,” Draghi said at a press conference in Frankfurt after policy makers left the benchmark rate at a record low of 0.75 percent.

The ECB lowered its inflation forecast for next year to 1.6 percent from 1.9 percent.

“The market hears what it perceives to be as hints as to the way policy may be moving in the future, so it’s understandable that the market is going to respond in the way it has been in weakening the euro,” Robert Lynch, head of currency strategy for HSBC Holdings Plc in New York, said in a Bloomberg Television interview with Sara Eisen. “Now they’re in technical recession with a forecasted level of minus 3 percent, with lower inflation. So that’s a dynamic that would seem to call for more policy easing.”

Economic Weakness

Gross domestic product in the euro area fell 0.1 percent in the third quarter from the previous three months, when it dropped 0.2 percent, the European Union’s statistics office said today, confirming an initial estimate published on Nov. 15.

“The hint that there are members on the council who are looking for an additional rate cut, that’s what’s leaning on the euro at this point,” Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York, said in a telephone interview. “Draghi had looked for 2013 to be the turnaround point. His comments today suggested the council now has pushed back that point” for the economy’s recovery.”

The euro has weakened 2.3 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen was the worst performer, falling 9.6 percent, and the dollar dropped 2.4 percent.

The so-called kiwi advanced for a fourth day against the greenback after the Reserve Bank of New Zealand left its official cash rate unchanged at a record-low 2.5 percent, in line with the estimates of 16 economists in a Bloomberg survey.

“The overall outlook is for stronger domestic demand and the elimination of current excess capacity by the end of next year,” central bank Governor Graeme Wheeler said in Wellington. “This is expected to cause inflation to rise gradually toward the 2 percent target midpoint.”

New Zealand’s dollar rose 0.5 percent to 83.27 U.S. cents after advancing to the strongest since Sept. 28.

“The statement from the RBNZ is less dovish than the market had anticipated, and that’s why we see a stronger New Zealand dollar,” said Yuki Sakasai, a foreign-exchange strategist in New York at Barclays Plc. “The market saw the slight possibility of a rate cut next year.”

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net

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


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