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FOREX-Euro falls vs dollar, yen as Draghi assures on loose policy

Posted by Joseph Trevisani on Jun 26, 2013 10:36:00 AM

Reuters

Wed Jun 26, 2013 9:29am EDT

* Dovish comments from ECB's Draghi weigh on euro

* U.S. Treasury-German bund spreads point to further dollar gains

* Strong U.S. economic data also lifts dollar

NEW YORK, June 26 (Reuters) - The euro fell to a three-week low against the dollar and slipped against the yen on Wednesday after European Central Bank President Mario Draghi highlighted downside risks to euro zone growth and said monetary policy will stay accommodative.

The euro briefly pared losses against the dollar after final data showed U.S. gross domestic product growth was more tepid than previously estimated in the first quarter but the impact was fleeting. U.S. growth was held back by moderate consumer spending, weak business investment and declining exports.

But the ECB remained the focus. Draghi said on Wednesday that the economic recovery in the euro zone would be gradual but fragile, which was in line with his previous day's comments that the ECB was nowhere near exiting its accommodative monetary policy.

"Juxtaposed against shifting Fed policy (Draghi's comments) highlights that relative central bank policy will soon shift from supporting to weighing on the euro," Camilla Sutton, chief FX strategist at Scotiabank, said after Draghi's comments.

The bank has made no change to their year-end target of $1.25 per euro.

The single currency was down 0.3 percent at $1.3046, not far from the $1.3012 hit earlier which was its lowest since June 3. An options barrier was reported at $1.30. Technical analysts said a daily close below its 200-day simple moving average at $1.3072 could trigger more falls toward and below $1.30.

Analysts pointed to the recent sharp rise in short-term euro inter-bank lending rates, which could drive the ECB to respond by easing monetary conditions and which in turn could weigh on the euro.

The three-month Euribor rate, traditionally the main gauge of unsecured bank-to-bank lending, had spiked from 0.198 percent on May 21 to 0.225 percent on June 25.

"The U.S. economy is still in better shape than Europe, which is still very weak and can't withstand higher (short-term) rates at this time, and rate spreads will continue to pressure euro/dollar lower," said Paul Robson, FX strategist at RBS.

"Draghi on balance will have to sound a bit more dovish to make sure that markets don't start pricing in (an interest) rate hike too early."

The unexpected drop in the final reading of U.S. GDP caused some volatility.

Gross domestic product expanded at a 1.8 percent annual rate, the Commerce Department said in its final estimate. Output was previously reported to have risen at a 2.4 percent pace after a 0.4 percent stall speed in the fourth quarter. .

"The unexpected revision to GDP will bring to question the Federal Reserve's assertion that the economy is strong enough to begin ending quantitative easing," said Joseph Trevisani, chief market strategist at WorldWideMarkets. "The dollar will go down because its strength has been predicated on higher U.S. interest rates."

Spreads between 10-year U.S. Treasuries and German bund yields have widened to their highest since April 2010 in favor of the dollar assets.

Niels Christensen, currency strategist at Nordea said investors would "need more confirmation of the growth momentum in the U.S." for the euro to start falling towards the early May and early April lows just below $1.28.

The dollar rose to a three-week high of 82.909 against a basket of currencies, buoyed mainly by solid gains against the euro. It was the sixth straight day the dollar index advanced.

But it stayed weak against the yen and was down 0.4 percent at 97.44 yen as worries about a cash crunch in China supported safe-haven flows into the Japanese currency.

Traders will watch a string of Fed speakers later in the day to gauge their stance on how quickly monetary easing will be scaled back.

Minneapolis Fed President Narayana Kocherlakota said on Wednesday that the extent of the run-up in bond yields after the U.S. Federal Reserve last week announced a plan to eventually remove monetary stimulus was a surprise.

 

Chart: Bloomberg

ScreenHunter 1353 Jun. 26 10.47

Topics: EURUSD, EURO, Fundamental Analysis, economic statistics, US GDP

 

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