Euro Tumbles to Near Two-Year Low

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There was no letup in the pressure on the euro Thursday, with the currency tumbling to its weakest point against the runaway dollar in almost two years.

The common currency sank to $1.2697 in early European trade, extending its overnight losses to hit its weakest since November 2012.

Analysts and traders pointed to Tuesday’s anemic eurozone business activity data, coupled with further dovish comments from ECB chief Mario Draghi, as short-term catalysts for the move. Mr. Draghi on Wednesday repeated that the ECB is open to using further unconventional policy measures to head off the threat of perilously low inflation.

But the euro has also been crushed by a sizable rally in the dollar, which has seen the buck chalk up big gains against a range of currencies.

The dollar climbed to ¥109.35 against the yen on Thursday, just shy of last week’s six-year high.

Wednesday’s better-than-expected U.S. housing data underlined the relative strength of the U.S. economy, which has prompted investors to wonder if the Federal Reserve will soon have to think about bumping up interest rates—as the ECB comes up with new ways to ease policy.

“We have this big divergence between U.S. and Europe in monetary policy. That’s not going to change any time soon,” said Luca Paolini, chief strategist at Pictet Asset Management, which manages $455 billion of assets.

Pictet favors the dollar relative to the euro in its portfolios, Mr. Paolini added.

Many expect the euro’s slump to deepen further.

Euro Sinks But Dollar In Control Another day, another notable low for the euro, which has traded at its lowest levels in nearly two years. Commerzbank sums up a key point nicely: “The euro was able to stand its ground quite well against the G10 currencies. The main reason behind that is probably that both Riksbank and Norges Bank made it clear that fears about an excessively strong currency were causing them to pursue a monetary policy completely independent of the ECB’s–an approach the SNB is also running. The Fed is not slowed by this precaution, allowing the dollar to appreciate on a broad basis.” Now at $1.2744. ([email protected])

Dollar Bid Against Most Currencies The dollar is in demand against most currencies as US bond yields recover from their recent downtick, says Barclays. “The US Dollar index closed convincingly above last year’s range highs to trade at levels last seen in July 2010 as the euro broke lower,” strategists write. The move below the 2013 lows in EUR/USD suggests that further longer-term weakness. The pair is now trading at 1.2724. USD/CHF managed to break bullishly to extend a six-week rally, while NZD/USD extended losses in what stands to be the worst week since October 2013, analysts also noted. ([email protected])

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“We expect the euro to be on a large multiyear downtrend as stimulus will come exclusively from monetary policy,” said analysts at Barclays. BARC.LN +0.11% The euro could fall to $1.17 over the next six months, they said, as expectations build that the ECB will have to resort to a large-scale program of asset purchases known as quantitative easing to bolster inflation. The central bank has already pledged to buy some types of nongovernment bonds. An extension into sovereign debt is widely seen as the next big step.

Even so, the euro’s losses have so far come mainly against the dollar. That is largely because a number of other central banks—including those in Sweden, Norway, and Switzerland—have made it clear they will pursue policies to avoid excessive strength of their currencies, according to Esther Reichelt, a currency strategist at Commerzbank. CBK.XE +1.85%

“The Fed is not being slowed by this precaution. So for the time being the Fed pursues its solo role within the G-10 universe—allowing the dollar to appreciate on a broad basis,” Ms. Reichelt said.

Elsewhere in currency markets, the New Zealand dollar fell to its lowest level in more than a year after the central bank governor said the exchange rate is “unjustified and unsustainable” and susceptible to a “significant downward adjustment.”

The so-called Kiwi dollar was 1.4% lower at US$0.7955, its lowest level since early September 2013.

 

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