(Bloomberg) -- The euro extended its losing run to the longest since June after European Central Bank officials expressed concern over its strength, spurring speculation that they may consider easing monetary policy further.
The common currency weakened as much as 0.6% on Thursday, while Italian government bonds added to their gains from the previous two sessions, when they outperformed most European peers. Better-than-expected U.S. economic data and the ECB remarks have driven some investors to take a profit on long-euro trades, said Georgette Boele, a strategist at ABN Amro.
The euro has fallen about 1.5% since it breached $1.20 for the first time in more than two years, a key psychological level for traders. Within hours of the breach on Tuesday, ECB chief economist Philip Lane spurred a rout when he said the currency’s advance feeds into the central bank’s forecasts and monetary-policy setting.
The Financial Times later reported that policy makers were concerned that its gains will weigh on exports and bring down prices. Their next policy decision is set for Sept. 10.
“The ECB has been reluctant so far to lower rates deeper into negative territory but they could find themselves under more pressure to cut rates again if the stronger euro becomes a bigger concern,” said Lee Hardman, a foreign exchange strategist at MUFG Bank.
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The euro trimmed its decline to 0.3% as of 11:08 a.m. in London to $1.1817. ABN Amro’s Boele sees the currency falling to as low as $1.15 by the end of September.
Short-term speculative investors are seeking to take profit on short positions at around $1.1750, according to Europe-based traders who asked not to be identified because they aren’t authorized to speak publicly. In another sign that the euro’s drop is seen as just a blip, institutional investors are buying dips as the currency heads toward $1.16.
Euro Strength
The tools at the central bank’s disposal might be more restricted than the rhetoric of officials indicates. The ECB’s key policy rate has been at a record low of minus 0.5% for about year.
“Subtle verbal intervention is the most they could do as the policy options are fairly limited, even though the market is speculating about rate cuts again,”’ said Christoph Rieger, head of rates at Commerzbank AG.
Still, the mere prospect of more easing is a boon for government debt, especially for those in Europe’s periphery, which have benefited most from the ECB’s measures. The yield on Italy’s 10-year bonds fell as much as three basis points Thursday to 0.95%.
Euribor futures, which are tied to the three-month benchmark funding rate, continued to climb higher, buoyed by the prospect of further monetary policy easing. The contracts expiring in 2021 and 2022 are all above 100.50, which signals three-month Euribor may drop below minus 0.50%. That’s below a record low of minus 0.491% set last month.
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