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Euro Falls as Draghi Remains Dovish on Rates

Wednesday, 26 Jun 2013 | 5:07 PM ET
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The euro declined to a three-week low against the U.S. dollar and fell against Japan's yen on Wednesday after European Central Bank President Mario Draghi highlighted 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. U.S. growth was held back by moderate consumer spending, weak business investment, and declining exports.

The ECB remained the key focus. Draghi said on Wednesday the economic recovery in the euro zone would be gradual but fragile, in line with his comment, a repeat of one made the previous day, that the ECB was nowhere near exiting its accommodative monetary policy.

(Read More: Europe Is Wasting Time: Euro Architect Issing)

"A recession-hit economy, rising borrowing rates for debt-struggling nations and the ECB's accommodative and ready-to-act-anew stance are all conspiring to pressure the euro," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

Dovish easing sentiment surrounding the ECB contrasts with the expectations for the Federal Reserve to slow its bond purchases sooner than other central banks.

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

The euro was recently down 0.6 percent at $1.3008, not far from $1.2983, its lowest since June 3. An options barrier was defended at $1.30 in the New York time zone but selling pressure ultimately outweighed support at that level.

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.

(Read More: S&P 500 Has Topped for 2013: Pro)

ECB vs. Fed
Geoffrey Yu, FX strategist at UBS, comments on EUR/USD, and says the market is treating ECB and Fed policies by different standards.

"A large part of the sell-off in euro/dollar from its high of $1.34 on June 19th to its low of $1.2985 today was driven by re-pricing of FOMC expectations," said Kathy Lien, managing director at BK Asset Management.

Euro volume against the dollar was at $6.3 billion in afternoon trading, based on Reuters Dealing data.

Against the yen, the euro was last down 0.6 percent at 127.18 yen, after earlier hitting a one-week low at 126.53 yen.

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

(Read More: Dollar to Face Stiff Resistance on Its Way Up: Chart)

Meanwhile, 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.

"While GDP numbers are very backward-looking, this revision is large enough to raise concerns that Bernanke is looking to reduce asset purchases prematurely," said BK's Lien.

A gauge of the dollar against a basket of currencies rose to a three-week high of 83.003, buoyed mainly by solid gains against the euro, and was last at 82.948, up 0.4 percent. It was the sixth straight day of gains for the dollar index.

The dollar also climbed to its highest since June 5 against the Swiss franc and it last changed hands at 0.9428 franc, up 0.5 percent.

But the greenback was flat against the yen at 97.70 yen. It was much lower earlier in the session as worries about a cash crunch in China supported safe-haven flows into the Japanese currency.

The Australian dollar rose 0.2 percent to US$0.9276 after Australia's former leader Kevin Rudd toppled Julia Gillard to return as prime minister on Wednesday. He reclaimed the job on his third attempt and with elections less than three months away.

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