U.S. dollar continues rally against euro, amid possible rate hike delay

Investing.com –

Investing.com — The U.S. dollar rallied by more than 1% against the euro on Tuesday, amid weaker than expected services data in the euro zone and expectations for a delayed interest rate hike by the Federal Reserve.

EUR/USD fell 0.0116 or 1.06% in U.S. afternoon trading to 1.0807, moving steadily lower from a daily-high of 1.0956 in European morning trading. European markets reopened on Tuesday after a four-day weekend for the Easter holiday.

The pair likely gained support at a low of 1.05 from March 11 and resistance at 1.11, the high from Mar. 4. On Monday, EUR/USD moved above 1.10 for the first time since Mar. 25, before falling back to 1.094.

While the Markit Eurozone Services Business Activity Index increased from 53.7 in February to 54.2 in March, expansion in output still fell below previous estimates of a 54.3 reading. Increases in Germany, Italy and Spain accelerated growth while the United Kingdom’s service-sector PMI peaked at 58.9, to reach a multi-month high.

Price discounting throughout the euro zone drove growth on the continent.

“The PMIs are indicating somewhat sluggish GDP growth of 0.3% for the first quarter.,” said Chris Williamson, Chief Economist at Markit. “However, the important message from the survey data is that the pace of expansion looks set to gather pace in coming months.

Meanwhile, in the U.S. Federal Reserve Bank of Minneapolis president Narayana Kocherlakota said at a speech on Tuesday that the Fed may not need to raise its benchmark Federal Funds Rate until the second half of 2016.

“In light of the outlook for unduly low employment and unduly low inflation, the Fed can be both late and slow in reducing the level of monetary accommodation,” Kocherlakota said in a speech to the Chamber of Commerce in Bismarck, N.D.

The comments came in light of a disappointing U.S. jobs report last Friday when the U.S. Bureau of Labor Statistics said in its monthly jobs report that the economy added 126,000 in March, halting a streak of 12 consecutive months of job growth that exceeded 200,000. The modest job increases nationwide marked the weakest period of hiring in 15 months. In terms of average weekly earnings, employees nationwide received the smallest annual gains in wages since last June.

The labor force participation rate, which measures the number of people who are either employed or actively looking for work, also painted a bleak outlook. During the month of March, the rate ticked down to 62.7%, the lowest level in 36 years.

In mid-March, Federal Reserve chair Janet Yellen indicated that the Fed could begin raising interest rates when it was “reasonably confident” that inflation will move toward its target inflation of 2%. Yellen added that the Fed will take a “data-driven” approach to potential liftoff by keeping a close eye on wage and GDP growth before raising rates.

Yields on the U.S. 2-year, meanwhile, have ticked up to 0.520, after reaching a two-month low at 0.47 late last week. At Tuesday’s 3-year note auction of U.S. Treasuries, yields stood at 0.865% with average demand of $ 24 billion. Many analysts believe the lower yields reduce the possibility that the Federal Reserve could increase rates by June.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, edged up on Tuesday by 0.95 points to 98.16

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Factbox – How low can they go? Central bank policy easing in 2015

(Reuters) – A total of 26 central banks and monetary authorities around the world have eased policy this year, in an unprecedented wave of measures aimed at boosting growth and bolstering inflation. Below is a chronological list of the moves.

Jan. 1 UZBEKISTAN

Uzbekistan’s central bank cuts its refinancing rate to 9 percent from 10 percent.

Jan. 7/Feb. 4/March 31 ROMANIA

Romania’s central bank shaved another quarter point off its benchmark interest rate to a record low of 2.00 percent with weak inflation expanding its room to ease.

Jan. 15 SWITZERLAND

The Swiss National Bank stuns markets by scrapping its three-year-old cap on the franc’s value against the euro, leading to a surge in the currency. The de facto tightening, however, is in part offset by a cut in the interest rate on certain sight deposit account balances of 0.5 percentage points, to -0.75 percent.

Jan. 15/March 4 INDIA

The Reserve Bank of India unexpectedly lowers its policy rate for the second time this year, backing the 10-month-old government of Prime Minister Narendra Modi in its push to revive economic growth as inflation cools.

Jan. 15 EGYPT

Egypt’s central bank makes a surprise 50-basis-point cut in its main interest rates, reducing the overnight deposit and lending rates to 8.75 and 9.75 percent, respectively.

Jan. 16 PERU

Peru’s central bank unexpectedly cuts its benchmark interest rate to 3.25 percent from 3.5 percent after the country posts its worst monthly economic expansion since 2009.

Jan. 20 TURKEY

Turkey’s central bank lowers its main interest rate, but draws heavy criticism from government ministers, who say the 50- basis-point cut, five months before a parliamentary election, is not enough to support growth.

Jan. 21 CANADA

The Bank of Canada cuts interest rates to 0.75 percent from 1 percent, where they had been since September 2010, ending the longest period of unchanged rates in Canada since 1950.

Jan. 22 EUROPEAN CENTRAL BANK

The ECB launches a government bond-buying programme which will pump over 1 trillion euros into the sagging euro zone economy, starting in March and running to September next year and perhaps beyond.

Jan. 24 PAKISTAN

Pakistan’s central bank cuts its key discount rate to 8.5 percent from 9.5 percent, citing lower inflationary pressure because of falling global oil prices. Central Bank Governor Ashraf Wathra says the new rate will be in place for two months, until the next central bank meeting to discuss further policy.

Jan. 28 SINGAPORE

The Monetary Authority of Singapore unexpectedly eases policy, saying in an unscheduled policy statement that it will reduce the slope of its policy band for the Singapore dollar because the inflation outlook has “shifted significantly” since its last review in October 2014.

Jan. 28 ALBANIA

Albania’s central bank cuts its benchmark interest rate to a record low 2 percent. This follows three rate cuts last year, the most recent in November.

Jan. 30/March 13 RUSSIA

Russia’s central bank cuts its one-week minimum auction repo rate by 100 basis points to 14 percent, less than two months after cutting it by two points to 15 percent, as fears of recession mount following the fall in global oil prices and Western sanctions over the Ukraine crisis.

Feb. 3 AUSTRALIA

The Reserve Bank of Australia cuts its cash rate to an all-time low of 2.25 percent, seeking to spur a sluggish economy while keeping downward pressure on the local dollar.

Feb. 4/28 CHINA

China’s central bank cuts interest rates for the second time in a month to fight off economic slowdown and rising deflation risks. Following a system-wide cut to bank reserve requirements in early February, policymakers follow up with a cut in benchmark interest and saving rates at the end of the month.

Jan. 19/22/29/Feb. 5 DENMARK

The Danish central bank cuts interest rates four times in less than three weeks and intervenes regularly in the currency market to keep the crown within the narrow range of its peg to the euro.

Feb. 2/March 19 COSTA RICA

Costa Rica’s central bank cuts its main interest rate by 0.25 percentage point to 4.5 percent, the second rate reduction in less than two months.

Feb. 13/March 18 SWEDEN

Sweden’s central bank cuts the key repo rate by 0.15 percentage points to -0.25 percent and says it will buy 30 billion Swedish crowns ($ 3.40 billion) of government bonds after already completing 10 billion crowns of purchases.

Feb. 17 INDONESIA

Indonesia’s central bank cuts its benchmark interest rate by a quarter of a percentage point to 7.5 percent, the first rate cut in three years.

Feb. 18 BOTSWANA

Botswana’s central bank cuts its benchmark lending rate by 100 basis points to 6.5 percent, saying the state of the economy and inflation outlook provided scope for easing monetary policy.

Feb. 23 ISRAEL

The Bank of Israel lowers its benchmark interest rate to 0.1 percent from 0.25 percent, its first reduction in six months, amid persistent deflation and a strengthening shekel.

March 4 POLAND

Poland’s central bank cuts interest rates by 50 basis points to an all-time low of 1.50 percent, to curb deflation and prevent excessive gains of its currency.

March 11 THAILAND

Thailand’s central bank cuts its benchmark interest rate by 25 basis points to 1.75 percent in a bid to spark the stubbornly sluggish economy. The cut is the first rate change in a year and expected by only five of 21 analysts in a Reuters poll.

March 12 SOUTH KOREA

South Korea’s central bank cuts interest rates for the first time in five months in a surprise move, lowering its base rate by 25 basis points to a record low of 1.75 percent.

March 12 SERBIA

Serbia’s central bank cuts its benchmark interest rate for the first time since November to 7.5 percent from 8 percent, to ward off deflation and support economic growth after a new IMF loan deal.

March 24 HUNGARY

Hungary’s central bank cuts its main interest rate for the first time in eight months, by 15 basis points to 1.95 percent, and flags further cautious easing as inflation evaporates.

(Compiled by Jamie McGeever; Editing by Larry King)

Euro Declines On Greece Jitters

The euro came under pressure on Tuesday, as Greece struggled to reach a compromise with its international creditors over economic reforms attached with the bailout deal.

Experts from the International Monetary Fund and the European Union are studying the reform proposals which Athens has proposed to unlock bailout money. While eurozone officials complained that Greece’s plans lack necessary details, Greek Prime Minister Alexis Tsipras argued that he would not submit to creditors unconditionally. Greece will run out of money by April 20 unless it receive bailout funds by then.

Eurozone inflation and jobless rate are due shortly. While the inflation is expected to fall for the fourth month in March, the pace of decline is expected to slow from last month.

In economic news, Germany’s retail sales growth eased at a slower-than-expected pace in February, preliminary figures from Destatis showed.

Retails sales grew 3.6 percent year-over-year in February, slower than January’s 5.0 percent climb, which was revised from a 5.3 percent increase.

The euro was lower against its major opponents, except the franc, on Monday. The EUR/USD pair fell by 0.5 percent yesterday, hurt by continued standoff between Greece and its creditors.

The single currency declined to 1.0744 against the U.S. dollar, its lowest since March 20. Continuation of the euro’s downtrend may lead it to support around the 1.05 zone. The pair ended yesterday’s trading at 1.0831.

The euro declined by 0.5 percent to hit a 4-day low of 0.7277 against the Sterling. If the euro extends slide, it may find support around the 0.72 mark. At Monday’s close, the pair was valued at 0.7312.

Reversing from an early 4-day high of 130.25 against the yen, the euro slipped to a 4-day low of 129.17. The next possible downside target for the euro-yen pair may be located around the 128.00 area. The euro-yen pair was worth 130.03 when it ended Monday’s trading.

Japanese housing starts declined at a slower than expected pace in February, data from the Ministry of Land, Infrastructure, Transport and Tourism showed.

Housing starts dropped 3.1 percent in February from last year, slower than January’s 13 percent decline and an expected decrease of 7 percent.

The 19-nation currency pulled back from an early high of 1.0484 against the Swiss franc, and was steady in subsequent trading. The pair was trading at 1.0460, compared to yesterday’s New York session close of 1.0476.

The euro declined to 4-day lows of 1.3675 against the loonie and 1.4375 against the kiwi, off early high of 1.3748 and a 5-day high of 1.4458, respectively. The euro is poised to challenge support around 1.36 against the loonie and 1.40 against the kiwi.

The euro moved away from an early session’s high of 1.4180 against the aussie, edging down to 1.4113. Next key downside target for the euro may be found around the 1.41 mark.

Looking ahead, Canada GDP for January, U.S. S&P Case Shiller home price index for January, Chicago PMI for March and U.S. consumer confidence index for March are set to be published in the New York session.

At 7:55 am ET, U.S. Federal Reserve Bank of Richmond President Jeffrey Lacker is expected to speak on Economic outlook in Richmond.

Danièle Nouy, Chair of the ECB Supervisory Board, will deliver a speech before the European Parliament’s Committee on Economic and Monetary Affairs on Brussels at 9:00 am ET. At the same time, U.S. Federal Reserve Bank of Cleveland President Loretta Mester moderates a policy session at a conference in Stone Mountain, Georgia.

At 3:00 pm ET, U.S. Federal Reserve Bank of Kansas City President Esther George is expected to speak on the U.S. economy in New York.

by RTT Staff Writer

For comments and feedback: [email protected]

Business News

Euro zone price fall slows as expected, deflation fears ease

By Jan Strupczewski

BRUSSELS (Reuters) – Euro zone consumer prices fell again in March, as expected, but the decline was the smallest this year, indicating the price of goods and services could start rising again soon.

Meanwhile, the region’s unemployment rate fell to its lowest in almost three years, a sign the economy is picking up steam and inflation is likely to rise.

Consumer prices in the 19 countries sharing the euro fell 0.1 percent year-on-year this month, the European Union’s statistics office Eurostat estimated. Prices fell 0.3 percent in February and 0.6 percent in January.

The bottoming out of price declines is likely to be welcome news for the European Central Bank, which wants to keep inflation below, but close to 2 percent over the medium term. It started printing money in March to inject more cash into the economy and ward off concerns of persistently falling prices, or deflation.

“Inflation will soon flatten out, and will turn clearly positive in the second half of the year,” said Nick Kounis, head macro and financial markets research at ABN AMR.

“The drag from energy will ease in the coming months, while food price inflation (now unusually weak) is likely to gradually edge up as it follows developments in agricultural prices with a long lag,” he said.

“Finally, later in the year – and more so in 2016 – the impact of the weaker euro will feed through. Overall, then we look to be in a world of ‘lowflation’ rather than ‘deflation’,” Kounis said.

As in previous months, the decline was mainly driven by a drop in the price of energy, which was 5.8 percent cheaper in March than a year earlier.

Core inflation, which excludes volatile energy and unprocessed food costs, was 0.6 percent year-on-year, down from 0.7 percent in February and the same as in January.

“The data will likely dilute fears that deflation could become entrenched in the euro zone with long-term debilitating growth effects,” said Howard Archer, economist at IHS Global Insight.

“In fact, it may not be long before the markets start seriously questioning whether the ECB will continue to fully enact its quantitative easing programme all the way through to September 2016,” Archer said.

In another positive sign for the euro zone economy, Eurostat said euro zone unemployment fell to 11.3 percent of the workforce in February from an upwardly revised 11.4 in January — the lowest rate since May 2012.

Eurostat said 18.204 million people were without jobs in the euro zone in February, 49,000 people fewer than a month earlier.

(Reporting By Jan Strupczewski; Editing by Philip Blenkinsop, Larry King)

Higher German prices could help spur euro zone inflation

By Michelle Martin

BERLIN (Reuters) – German consumer prices rose in March for the first time this year when harmonised to compare with other European Union countries, and could help spur euro zone inflation.

EU-harmonised consumer prices were up 0.1 percent on the year in Europe’s largest economy after dropping 0.1 percent in February, preliminary data from the Federal Statistics Office showed on Monday.

Some economists said the pickup in German inflation, along with data on Monday showing Spain’s EU-harmonised inflation rate rose to -0.7 percent in March from -1.2 percent in February, would likely give the euro zone figure due to be published on Tuesday a boost.

The German reading was in line with a Reuters forecast. Germany’s non EU-harmonised national consumer price index rose by 0.3 percent on the year with service prices increasing while food and energy prices dropped less sharply than in the previous month.

Christian Schulz, senior economist at Berenberg Bank, said the Spanish and German figures could even help the euro zone break a run of negative inflation figures: “On the basis of these two countries, there is a chance that euro zone inflation could climb out of negative territory in March.”

Still, even if inflation returned in the euro zone it would remain well below the European Central Bank’s target of close to but just below 2 percent over the medium term.

A Reuters poll conducted before Monday’s data was published showed economists expect euro zone consumer prices to fall by 0.1 percent in the single currency bloc in March after dropping by 0.3 percent in February. (ECONEZ)

Jennifer McKeown, economist at Capital Economics, said that because German wage growth has been moderate at a time when the economy still has spare capacity, core inflation is not likely to pick up suddenly, especially while oil is cheap.

“We expect energy prices to continue to exert a heavy drag on the headline rate for the next six months or so, which may see headline inflation dip back into negative territory in the near future. But the drag should ease somewhat later this year.”

(Editing by Noah Barkin and Susan Fenton)

FOREX-Euro down on Greece uncertainty, rate outlook drives dollar up

* Dollar up 0.6 percent against yen and euro

* Euro weighed down by uncertainty over Greece

* Yellen’s message on gradual tightening provides no fresh impetus (Updates prices, quotes)

By Ahmed Aboulenein

LONDON, March 30 (Reuters) – The euro fell on Monday, hurt by uncertainty over whether Greece and its creditors will be able to strike a deal that will help Athens secure funding before it runs out of money by April 20.

Talks continued through the weekend and Athens sounded upbeat, but its lenders said compiling a list of reforms could take several more days. Fitch cut Greece’s credit rating to ‘CCC’ from ‘B’ on Friday.

The dollar rose after Federal Reserve chair Janet Yellen underscored the view that the Fed is likely to start raising interest rates gradually later this year.

The dollar rose 0.5 percent to 119.78 yen, while the euro fell 0.6 percent to $ 1.0830 as it pulls away from a 12-year trough of $ 1.0457.

“Even though euro short positions are at record highs, given the Greek uncertainty and the bias for more monetary injection by the European Central Bank, the path for least resistance is a lower euro/dollar,” said Jeremy Stretch, head of currency strategy at CIBC World Markets.

“Unless the euro drops below $ 1.0770 we could see ranged trading, but with the Fed still looking to raise rates, we could see conditions later this week that are more helpful for overall dollar strength.”

The euro got little help from data that showed consumer prices in Germany picking up. Prices are set to rise in March after falling in the first two months of this year, but inflation is still likely to remain low.

“It is a lot more complicated than just looking at Germany. Yes, we need to see higher inflation in Germany, which would help a price adjustment, but at best better German data is just going to halt the euro decline rather than reverse it,” said Simon Smith, chief economist at FxPro.

For the dollar, U.S. jobs data on Friday will be the key event this week. A robust report could see investors position for tighter monetary policy sooner rather than later.

In a speech on Friday, Yellen outlined the case for a ‘gradualist approach’ to rate hikes, mirroring comments after the FOMC meeting on March 18. She signalled the Fed is likely to start raising rates later this year but said policy tightening could “speed up, slow down, pause, or even reverse course” depending on developments in the economy.

“The jobs numbers are going to be important, but I don’t think they will be the deciding factor determining when the Fed does eventually put rates up,” Smith said.

(Additional reporting by Anirban Nag; Editing by Larry King)

U.S. stocks sag as euro equities, dollar gain

By Michael Connor

NEW YORK (Reuters) – Wall Street drifted down while European shares neared record highs in choppy global equities trading on Tuesday as the dollar rebounded and oil prices fell.

The dollar’s gains knocked the euro back below $ 1.10, even as yields on U.S. Treasuries eased on betting in credit markets that low inflation will persist and delay interest rate hikes by the Federal Reserve.

Data from home sales to inflation and manufacturing published on Tuesday indicated the U.S. economy remains strong but did little to shift Wall Street expectations about the timing of the first Fed rate increases since 2006.

The Dow Jones industrial average (.DJI) closed down 104.96 points, or 0.58 percent, at 18,011.08, the S&P 500 (.SPX) lost 12.92 points, or 0.61 percent, to 2,091.50 and the Nasdaq Composite (.IXIC) dropped 16.25 points, or 0.32 percent, to 4,994.73.

Declines on the Nasdaq were held in check by a boost from Google (GOOGL.O), up 2 percent to $ 570.19. Morgan Stanley’s (MS.N) chief financial officer is leaving the bank to join Google.

Europe’s FTSEurofirst 300 (.FTEU3) index of top shares closed up 0.26 percent at 1,604.36, near a recent 7-1/2-year high, after a stronger-than-expected survey showed euro zone manufacturing at a four-year high.

The MSCI world equity index , which tracks shares in 45 nations, was off 0.21 percent at 432.00 after rising to almost 434.5, according to Thomson Reuters data.

The euro (EUR=) topped $ 1.10 early in the global session but was last down 0.30 percent at $ 1.092. The dollar has been on a roll for 12 months, rising more than 20 percent against a basket of major currencies on expectation of higher U.S. rates.

“Any positive surprises from the euro area are further adding to this euro/dollar rally; however we think this is temporary,” said Nikolaos Sgouropoulos, foreign exchange strategist at Barclays in London. “We still believe in the dollar strength trend going into the second half of the year.”

The greenback’s gains have been tempered somewhat since the Fed last week cut its forecasts for U.S. inflation and growth, forcing investors to reconsider when the Fed might start raising rates.

The dollar index (.DXY) was last up 0.1 percent at 97.156, below its 12-year peak of 100.390 struck on March 13.

San Francisco Fed President John Williams said on Tuesday the strong dollar would drag on growth this year, though the U.S. economy was strong enough to handle it.

Bond yields fell with inflation remaining low. Core U.S. consumer inflation is running at a 1.7 percent year-over-year rate and U.K. inflation was unchanged on an annual basis.

Benchmark 10-year U.S. Treasury notes were last up 10/32 in price, the yield falling to 1.88 percent.

Brent crude fell under $ 55 a barrel (LCOc1) and was last off 1.61 percent at $ 55.02, as Saudi Arabia said its production was close to an all-time high. [O/R]

(Additional reporting by Jemima Kelly, Ahmed Aboulenein, Patrick Graham and John Geddie in London, Blaise Robinson in Paris and Lisa Twaronite in Tokyo; Editing by Mark Trevelyan, James Dalgleish and Dan Grebler)

Currencies: Dollar steadies on renewed views of early Fed rate increase

The dollar was steady against the yen and the euro in Asia Friday, with the revival of expectations for an early U.S. rate increase giving support to the greenback.

The dollar USDJPY, +0.10%  was at ¥120.71, compared with ¥120.77 late Thursday in New York. The euro EURUSD, +0.05%  was at $ 1.0680 from $ 1.0660.

The overnight development in U.S. financial markets where stocks tumbled, U.S. Treasury yields and the dollar rose came in contrast with the previous day. On Wednesday, the Federal Reserve issued a dovish policy statement and its chairwoman Janet Yellen raised views that the Fed is likely to raise its key short-term interest rate in September or later.

“Given Thursday’s market development, as opposed to Wednesday’s, hopes for early Fed action haven’t receded. The possibility of June is still alive,” said Junichi Ishikawa, market analyst at IG Securities said.

Ishikawa cited how U.S. jobs and wage conditions, as well as inflation, will fare are crucial to gauging the timing of the Fed’s tightening down the road.

June rate hike back on the radar: “I personally think there is more than a 50% chance of the Fed’s rate increase in June, even though any action would be data-dependant,” said Yuji Saito, executive director of foreign exchange at Crédit Agricole Corporate & Investment Bank.

What does latest Fed move mean for economy?

Jason Meister of Avison Young New York Capital Markets joins MoneyBeat to discuss the Federal Reserve’s announcement Wednesday and what it means for jobs, markets and the economy.

Saito said it would be safe for the Fed to act when they believe they can minimize any shocks from its own action amid globally easing environments.

Read: The dollar’s meteoric rise may be just about over

Looking ahead, the release of both U.S. and Japan’s consumer price index data next week will be in focus as a clue for the direction of each monetary policy, said Saito who expects the dollar/yen rate to move in a ¥119-¥122 range next week.

Separately, the market mostly shrugged off remarks from the Bank of Japan Gov. Haruhiko Kuroda.

Speaking at the Foreign Correspondents’ Club of Japan, Kuroda said the BOJ is the first major central bank since the Great Depression to fight deflation, and if it succeeds, it “will strengthen confidence in central banks’ ability to achieve their price stability targets.”

Kuroda also said the central bank will make adjustments to its current policy as necessary without hesitation, when there are changes in the underlying trend in inflation.

The WSJ Dollar Index BUXX, -0.04% a measure of the dollar against a basket of major currencies, was down 0.14% at 88.33.

Interbank Foreign Exchange Rates At 00:50 EST / 0450 GMT Latest Previous %Chg Daily Daily %Chg 2150 GMT High Low 12/31 Dollar Rates Close High Low 12/31 USD/JPY Japan 120.71-72 120.76-77 -0.04 120.86 120.62 +0.83 EUR/USD Euro 1.0679-82 1.0659-62 +0.19 1.0697 1.0650 -11.72 GBP/USD U.K. 1.4760-65 1.4751-56 +0.06 1.4779 1.4744 -5.24 USD/CHF Switzerland 0.9893-97 0.9898-902 -0.05 0.9905 0.9874 -0.48 USD/CAD Canada 1.2685-90 1.2713-18 -0.22 1.2721 1.2674 +9.17 AUD/USD Australia 0.7673-77 0.7649-53 +0.31 0.7687 0.7645 -6.07 NZD/USD New Zealand 0.7431-37 0.7410-16 +0.28 0.7452 0.7404 -4.63 Euro Rate EUR/JPY Japan 128.90-94 128.70-74 +0.16 129.11 128.65 -11.05 Source: ICAP PLC

Write to Tatsuo Ito at [email protected]

(END) Dow Jones Newswires

March 20, 2015 01:28 ET (05:28 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.

Dollar-euro parity: What a one-to-one exchange means

As the euro’s value sinks, the dollar-euro parity could affect your plans: whether you are investing in foreign markets or just planning a spring vacation in the south of France.

The strong greenback against plunging euro prices means there could soon be a one-to-one exchange rate between the currencies. And the magical state of parity is a significant marker not only because it eliminates the cost of exchanging money-but also because it is a rare occurrence.

The last parity moment was in November 2002. Parity also occurred when the euro was introduced in 1999, and in 2000. So why now? The two currencies getting cozy signifies an ongoing trend in changing money supplies and disparate central bank policies between the United States and the European Union.

Read More $ 40 million says the euro will keep cratering

Because the United States and euro zone have floating exchange rates, the price of money is set by the market, not a government: supply (from the central bank) and demand for the currency.

Demand fluctuates based on factors including the expected inflation or deflation of the currency over time, the perception of a country as a stable place to hold valuable assets, the level of currency reserves needed for purchases, and interest rates.

The euro is getting weaker because we know the supply will go up. The European Central Bank has started an aggressive economic stimulus in the form of quantitative easing -in which it is buying bonds off the public-private markets in exchange for cash. Those purchases will flood the market with euros.

In fact, that’s the goal. Like the United States did, the European Union hopes to keep money cheap and accessible to its residents to spur economic growth.

But by the law of supply and demand, when there is more to go around, each euro is worth less. A glut of euros is particularly important because currency is seen as a store of value. Like we count on investments to create a return, we count on cash to buy as much as it did yesterday, minus a tiny but predictable amount of inflation each year.

Because the euro is becoming less valuable and has less purchasing power abroad, it’s not seen as a valuable way to hold assets, meaning that people may dump euro-denominated assets for an asset with more return.

As a result, the dollar is being seen as a more stable alternative to the euro and has relatively more purchasing power abroad. Compounding the situation, while rates of return in Europe spiral downward, the Federal Reserve is planning to raise interest rates and reduce the money supply-meaning that dollar-denominated assets will become more valuable.

American businesses that operate in Europe could feel the strain of dollar-euro parity because it means that it is relatively more expensive to buy their products. It also means that when U.S. companies bring their earnings back across the Atlantic, they dilute their euro-denominated earnings, which are now worth less than they used to be.

Even earlier in 2015, as the dollar strengthened and the euro weakened, multinational corporations like Procter & Gamble (NYSE: PG) and Caterpillar (NYSE: CAT) blamed the strong dollar for disappointing earnings.

While a rising dollar hurts U.S. businesses selling exports, it helps consumers looking for European imports.

If you’re throwing around the idea of buying a villa in Tuscany, now’s your chance. When the cost of exchanging money is eliminated, it will make any purchase in Europe relatively cheaper. Prices of goods can’t readjust right away to keep up with foreign demand. Those Haribo bears are priced for the locals, which mean you can get a steal.

Read More It’s time for that European vacation

No one knows for sure, but it’s likely that the moment of parity-the golden one-to-one ratio-will be brief. The overall currency trend of a beefy dollar and weak euro, however, may be more long term.

With Greece and Germany squabbling over the sluggish economy and a Fed decision to raise rates looming, the forces that are driving a wedge between the demand for euros and dollars may carry on for a while.

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Draghi Outflanking Kuroda as Bearish Euro Bets Surge

(Bloomberg) — With Mario Draghi poised to start injecting unprecedented amounts of money into the euro-zone economy, he’s already beating his Japanese peer in the global currency wars.

Bets on a weaker euro by hedge funds and other large speculators last month exceeded bearish yen wagers by the most since August 2012, data from the Commodity Futures Trading Commission show. Options suggest the shared currency is headed toward a 1 1/2-year low versus the yen, which would help the European Central Bank president achieve his ambitions of boosting growth and inflation.

While March heralds the start of Draghi’s 60 billion euros ($ 67 billion) of monthly bond purchases, traders are speculating the Bank of Japan is done with expanding the pace of its own quantitative easing. Anticipation of European QE has driven yields on about $ 1.9 trillion of euro-region bonds below zero, encouraging investors to quit the 19-nation currency.

More from Bloomberg.com: The Politics of Aging

“The euro will win the race to the bottom,” Ian Stannard, the Europe head of currency strategy at Morgan Stanley in London, said by phone Feb. 25. While the promise of QE “puts the euro under pressure,” there’s “less emphasis on the BOJ to provide further stimulus,” he said.

Gains Reversed

The euro tumbled 7.3 percent against its Japanese counterpart in 2015, unwinding some of the 45 percent advance during the previous three years. After dropping to 130.15 yen on Jan. 26, the weakest level since September 2013, it was at 134.26 as of 9:13 a.m. in London.

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While Draghi and BOJ Governor Haruhiko Kuroda insist they don’t target exchange rates, they’ve acknowledged the benefits weaker currencies can bring, from faster inflation to more competitive exports. Looser monetary policies worldwide are leading strategists to talk about a revival of the “currency wars,” a term coined by Brazil Finance Minister Guido Mantega to describe the competitive devaluations of 2010.

It’s clear who options traders think is winning the Europe-versus-Japan bout.

The premium for three-month contracts giving the right to sell the euro versus the yen, over those allowing for purchases, widened to 2.75 percentage points on Feb. 23, data compiled by Bloomberg show. That’s the most since July 2012, when Draghi made his pledge to do “whatever it takes” to save the euro.

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Further Losses

Sentiment has soured on the euro as the ECB pumped money into the economy, driving yields down so that investors are effectively paying euro-region governments to hold their cash. German five-year bond yields plunged to a record minus 0.11 percent last week, compared with positive 0.08 percent for equivalent Japanese securities on Monday.

Chris Turner, the head of currency strategy at ING Groep NV, the most accurate overall forecaster in last year’s Bloomberg foreign-exchange rankings, dismissed the idea that Draghi’s QE is already factored into the euro.

“Though some in the markets say it’s priced, and the currency doesn’t need to fall,” the experience of QE programs in Japan and the U.K. tell us differently, Turner said by phone from London on Feb. 26. QE tends to be “quite contemporaneous” in its impact on currencies, he said.

ING sees the euro falling about 10 percent by year-end to reach parity with the dollar for the first time since 2002, and predicts the yen will weaken about 8 percent versus the U.S. currency.

Euro Shorts

The euro has slumped more than 7 percent against the greenback this year, touching an 11-year low of $ 1.1098 on Jan. 26. For the past month, it’s held about there, surprising bears with its resilience as euro-region leaders wrangled over Greece and reached a provisional deal over extending the nation’s bailout.

The yen has been little changed versus the dollar since December, when it slumped to its weakest level since 2007.

Investors have roughly halved their net-short positions in the yen versus the dollar this year to 47,512 contracts, according to the latest data from the CFTC in Washington. Bets the euro will weaken increased by about 20 percent to 177,736.

Not everyone’s so sure the euro can keep falling against the yen. The ECB’s QE plan “should be in the price,” and Japan can still surprise markets by “beefing up” its own stimulus, said Daragh Maher, a strategist at HSBC Holdings Plc in London.

Boosting Inflation

Kuroda said in February he sees no immediate need to add to the 80 trillion yen ($ 667 billion) a year of sovereign bonds the BOJ’s already buying. He did signal he’s ready to adjust policy if necessary to reach his goal of boosting inflation to 2 percent. Core inflation was 0.2 percent in January when stripped of the effects of a 2014 sales-tax increase.

Draghi also is far from achieving his inflation target, with consumer prices falling 0.6 percent in January from a year earlier, matching a record low. The ECB said on Jan. 22 that QE would start sometime in March and last until at least September 2016. It may be expanded along the way.

The potential for more ECB purchases as the BOJ stands pat will push the euro 3 percent lower to about 130 yen this year, said Greg Gibbs, head of Asia-Pacific markets strategy at Royal Bank of Scotland Group Plc in Singapore.

“The euro’s just not as far down the track as Japan,” he said.

To contact the reporters on this story: Netty Ismail in Singapore at [email protected]; Lucy Meakin in London at [email protected]

To contact the editors responsible for this story: Garfield Reynolds at [email protected] Nicholas Reynolds, Paul Armstrong

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