Euro Plunges to 20-Month Low on ECB
(Bloomberg) -- The euro fell to its weakest level since June 2017 after European Central Bank President Mario Draghi downgraded the outlook for the region’s economy and promised more support, while the Bloomberg dollar index surged to its highest level this year.
The ECB’s decision to deliver fresh stimulus comes a day after the Bank of Canada dialed back its expectations for policy tightening, and Draghi is part of a growing chorus of central bankers around the globe pivoting toward more accommodative policy. While the Federal Reserve has also shifted to a less hawkish stance, bond yields in the U.S. remain higher than in other developed markets, maintaining the dollar’s allure.
The euro plunged as much as 1.2 percent to 1.1177, the weakest level since June 2017. The U.S. currency rose against all of its Group-of-10 counterparts except the yen Thursday and the Bloomberg Dollar Index climbed as much as 0.7 percent to its highest level since December.
“Traders will see this as dollar supportive inasmuch as central banks outside of the U.S. are still being seen in easing mode or being resistant to tightening monetary policy,” said Shahab Jalinoos, global head of foreign-exchange trading strategy at Credit Suisse Group AG. “The highest yielding currency in the G-10 has a natural advantage. That’s coming through to the dollar right now.”
With market volatility still relatively low, the dollar has proven to be one of the favored destinations for investors doing carry trades, which involve borrowing in a lower yielding currency and putting those funds to work in a market that has higher yields. On the flip side, the euro is seen by many as a good source of funding for those kinds of trades, and stimulatory moves by the ECB could provide ongoing support for that dynamic.
The yield on the 10-year Treasury was around 2.64 percent Thursday, compared with 1.76 percent for similar Canadian debt and 0.07 percent for equivalent German bunds.
The scaling back of European economic forecasts comes as the picture for growth around the world is looking softer. The Organisation for Economic Co-operation and Development has cut its global outlook, while China this week downgraded its goal for economic expansion, and gross domestic product growth in Australia disappointed.
Draghi said on Thursday that the euro-zone economy will now expand only 1.1 percent this year, a drop of 0.6 percentage point from the forecast given out just three months ago. A package of assistance from new loans for banks to a longer pledge on record-low rates is intended to expand the institution’s existing stimulus, he said.
The euro’s performance is not unique. Australia’s currency sank to a two-month low Wednesday after data showed the nation’s economy experienced its worst six-month period since the global financial crisis, and Reserve Bank of Australia Governor Philip Lowe said it’s hard to envision a scenario for raising rates this year. The Canadian dollar on Wednesday also slumped to its weakest level since January in the wake of the BOC meeting.
At the same time, traders remain upbeat about the U.S., with economists forecasting that data this Friday will show the world’s biggest economy added around 180,000 jobs in February, while wage growth is predicted to accelerate.
“The dollar is going to remain firm,” said Bipan Rai, head of North American foreign-exchange strategy at Canadian Imperial Bank of Commerce. “We’re still seeing strong data in the U.S.”
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