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Euro Races Toward Record Quarterly Drop

(Bloomberg) — The euro is poised for its biggest quarterly decline as the European Central Bank embarks on purchases of sovereign debt this week to spur inflation.

The shared currency has weakened about 11.6 percent this year, eclipsing the 10.6 percent decline during the credit crunch in the third quarter of 2008. The euro slumped to a 12-year low Wednesday as national central banks in the euro region were said to have purchased sovereign debt for a second day on Tuesday in their quantitative-easing program. The dollar has outperformed it major peers this year as the Federal Reserve contemplates its first interest-rate increase since 2006.

“Because the euro is falling for a legitimate fundamental reason and has the full support of the European policy makers, it really is easy to envisage even further heavy falls as quantitative easing continues,” said Sean Callow, a currency strategist at Westpac Banking Corp. in Sydney. “This selloff is driven by a historically large divergence in the monetary stance of the Fed and the ECB. It’s something that won’t turn around anytime soon.”

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The euro was little changed at $ 1.0694 at 6:58 a.m. in London from Tuesday, after reaching $ 1.0666, the weakest since April 2003. The 19-nation currency earlier touched 129.23 yen, the lowest since August 2013, before rising 0.1 percent from Tuesday to 129.70 yen.

140 Yen

Japan’s currency fell 0.1 percent to 121.30 per dollar. The Bank of Japan is far from done driving down the yen if it wants to secure 2 percent inflation target next year, a survey of economists by Bloomberg News shows. The median estimate of 27 economists in the March 5-10 survey suggests that the yen needs to fall to 140 per dollar, a level last seen in 1998, to help the central bank meet its goal.

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The euro has slumped 6.8 percent against its major peers this year, the most among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar, the best performer, has gained 6.9 percent, while the yen advanced 5.4 percent.

The ECB may see more capital leave the region than policy makers anticipated under its bond-buying program, pushing record low yields down even further, according to Deutsche Bank AG strategists George Saravelos and Robin Winkler.

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“The greater the European outflows, the more the euro can weaken and the lower global bond yields can stay,” Saravelos and Winkler wrote in their note March 9. “The large current account-surplus combined with ECB easing and negative rates has initiated a process of large-scale capital outflows.”

Record Level

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, was little changed at 1,209.46 and set for a record close.

The currencies of Australia and New Zealand extended declines for a fifth straight day after a report showed that industrial production in China, their biggest trading partner, rose less than economists had forecast.

Australia’s dollar slipped 0.2 percent to 76.13 U.S. cents, after earlier touching 75.88, the weakest level since May 2009.

Reserve Bank of Australia Assistant Governor Christopher Kent said Wednesday the nation’s currency is still “relatively high” given the economy’s state even after its recent depreciation.

“Kent described the exchange rate as high relative to the state of the economy, rather than relative to fundamentals,” Michael Turner, a debt and currency strategist at Royal Bank of Canada in Sydney, wrote in a note. “We expect this will be the new mantra.”

The kiwi dollar dropped 0.3 percent to 72.54 U.S. cents. The New Zealand Infant Formula Exporters Association said Wednesday some members have had orders reduced or halted after a threat to contaminate product was made public. Police said on Tuesday they’re investigating an anonymous threat to poison infant formula with the toxic 1080 pesticide unless the government stops using it by the end of this month.

The Reserve Bank of New Zealand will leave its overnight cash rate at 3.5 percent when it meets Thursday, according to 14 of 16 economists in Bloomberg survey, with two predicting a 25 basis-point cut.

To contact the reporter on this story: Netty Ismail in Singapore at [email protected]

To contact the editors responsible for this story: Garfield Reynolds at [email protected] Naoto Hosoda, Jonathan Annells

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