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Euro falls to 4-mth low on ECB rate cut, eyes more easing

The euro fell to a four-month low against the dollar after the European Central Bank cut interest rates, as expected, and said it would announce further policy easing measures to tackle the threat of disinflation.

The ECB cut the deposit rate to -0.10 percent, the main refinancing rate to 0.15 percent, and the marginal lending rate—or emergency borrowing rate - to 0.40 percent. Markets now turn their attention to ECB President Mario Draghi's press conference at 1230 GMT.

The ECB was widely expected to cut interest rates by 10-15 basis points, sending the deposit rate into negative territory for the first time and injecting liquidity into the banking system. The market is also expecting the ECB to offer longer-term loans in a bid to boost lending, without launching large-scale asset purchases as the Bank of Japan has done.


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Many see that as the first step towards quantitative easing by the ECB, prompting speculators and investors to build up large bets against the euro. Traders said if the ECB falls short of expectations, the euro could bounce.

The euro fell just below $1.36, its lowest level since early February, on trading platform EBS. It has shed about 3 percent from highs near $1.40 after Draghi on May 8 prepared the market for possible policy action at the June review.

Reflecting the nervousness over ECB action or lack thereof, overnight euro/dollar implied vols jumped to 22.30 percent from around 4.6 percent at the start of the week. The one-month implied euro/dollar volatilities - a gauge of how sharp swings are likely to be - held near four-month highs, trading at 6.75 percent on Thursday.

The dollar index hit a four-month high below 80.79.

The yen, meanwhile, appeared to be stabilizing after falling in the past few sessions. The dollar eased 0.2 percent to under 103 yen, down slightly from a one-month high of 102.80 yen set on Wednesday. The euro was down 0.4 percent around 139 yen.

—By Reuters

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