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Euro Drops to 4 1/2-Year Low as ECB Splits From Fed; Ruble Sinks

The euro slumped to the lowest in 4 1/2 years against the U.S. dollar after the European Central Bank signaled it will embark on large-scale government-bond purchases as the Federal Reserve moves closer to raising interest rates.

The 19-nation common currency slid for a third week after ECB President Mario Draghi said he can’t rule out deflation in the euro area. The yen also declined for a third week. The ruble plummeted 9.4 percent to lead emerging-market peers lower. The dollar advanced gained against all of its 16 major peers before a report next week that may show the jobless rate fell to a 6 1/2-year low.

“The U.S. labor market is performing well and the unemployment rate is falling further,” Ralf Umlauf, head of research for Helaba Landesbank Hessen-Thueringen in Frankfurt, said by phone yesterday. “In the euro zone, it’s a completely different picture. We have still very high unemployment rates near the historical top. So that’s the reason why we have the divergence in monetary policies.”

The euro dropped 1.5 percent last week to $ 1.2002 yesterday in New York after falling to $ 1.2001, the lowest since June 2010. The shared currency lost 1.3 percent against the yen to 144.63. Japan’s currency traded at 120.28 per dollar.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose 0.9 percent in the week to 1,141.02. It increased 11 percent last year, the biggest gain in data going back to 2005.

Looking Ahead

The dollar gained against all of its 31 major counterparts in 2014 for the first time in data going back to 1989, buoyed by an improving economy. Strategists don’t see a repeat of that dominance in 2015.

More than half of those counterparts are forecast to gain next year against the greenback, led by this year’s biggest loser, Russia’s ruble. It is predicted to add 17 percent after plunging 46 percent in 2014 under the pressure of sliding oil prices and U.S. and European economic sanctions against Russia for its role in Ukraine turmoil.

Mexico’s peso is projected to gain 9.9 percent after a losing 12 percent last year, and the Norwegian krone may add 4.6 percent after a 19 percent tumble.

Argentina’s peso is forecast to be the biggest loser in 2015, dropping another 29 percent after last year’s 23 percent descent.

The euro is projected to fall 1.7 percent and the yen 3.6 percent after each dropped 12 percent in 2015.

Lower Euro

The shared currency slumped 2.8 percent in December for a sixth straight month of losses, its longest skid since 2010.

“Those who are subtly encouraging the lower euro, they won’t be satisfied yet,” Richard Franulovich, the chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York, said by phone yesterday. The extent of euro weakness “really does come down to the composition and size of this sovereign QE that they’re talking about,” he said.

Draghi seldom gives interviews and his comments to the German newspaper Handelsblatt reflect a drive to win over that nation. Policy makers there have led criticism of quantitative easing, saying it threatens financial stability, reduces the incentive for governments to restructure their economies, and is legally tricky.

“The risk cannot be entirely excluded, but it is limited,” Draghi said when asked if the region could enter a spiral of declining prices, falling wages and postponed spending. “We have to act against such risk.”

Japan Easing

Policy makers in Japan have also embraced monetary stimulus to ward off deflation, prompting the yen to fall for a third consecutive year against dollar in 2014.

The foreign-exchange market is bracing for more yen-debasing stimulus measures from the Bank of Japan after the nation slipped into a recession last quarter. The BOJ can employ new measures to reach its 2 percent inflation goal in the 2015 year, Governor Haruhiko Kuroda said in an interview with the Mainichi newspaper.

The dollar gained as economists surveyed by Bloomberg forecast forecast the U.S. unemployment rate fell to 5.7 percent in December, the lowest since June 2008, before the Labor Department report on Jan. 9. Employers added 240,000 jobs, economists projected.

The Fed said it will be patient on the timing of the first interest-rate increase since 2006 and raised its assessment of the labor market at the last meeting of its Open Market Committee on Dec. 17. The FOMC’s next scheduled decisions are Jan. 28, March 18 and April 29.

Fed funds futures show a 63 percent probability that the central bank will raise rates by September, up from a 45 percent likelihood at the end of November.

Analysts at BNP Paribas SA recommended buying the dollar and selling the euro and yen in a note yesterday.

“With U.S. economic outperformance keeping U.S. yields and the U.S. dollar supported, investors’ question at the start of the year should not be whether to buy the USD, but which currency to sell against it,” the bank said.

To contact the reporter on this story: Lananh Nguyen in New York at [email protected]

To contact the editors responsible for this story: Dave Liedtka at [email protected] Kenneth Pringle, Greg Storey

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