Euro falls after ECB holds fire, dollar jumps as spreads widen

U.S. hundred dollar bills lie in a stash.
Alena Vikhareva | iStock | Getty Images

The euro weakened on Thursday after the European Central Bank announced more stimulus to fight the coronavirus impact but did not lower interest rates, with the single currency falling to the day's low as investors rushed for dollars.

The ECB approved fresh stimulus measures on Thursday to help the euro zone economy cope with the growing cost of the coronavirus epidemic, but kept interest rates unchanged in a move that may disappoint financial markets.

The euro, down before the announcement, jumped briefly to $1.13 but then skidded to as low as $1.1198, down 0.5% on the day. 

Market watchers had expected an ECB cut to the main deposit rate of 10 bps. A press conference is due at 1330 GMT in Frankfurt.

The dollar rebounded sharply after the ECB announcement, and was last up 1.1% against a basket of currencies at 97.60.

Analysts said the dollar had rallied as swap spreads on major currencies blew out and investors scrambled for the U.S. currency.

"It's all about dollar liquidity, the cross-currency basis swap has blown out. I would assume it's banks/corporates driven. We are moving to the next phase of the selloff," said Kenneth Broux, a strategist at Societe Generale.

Safe-haven currencies remained in demand on Thursday with the Japanese yen and the Swiss franc leading gains. The dollar had earlier struggled after U.S. President Donald Trump banned travel from Europe to stem the coronavirus.

With the latest ban posing a fresh disruption to the global economy, traders were also disappointed by the lack of broad measures in Trump's plan to fight the pathogen, prompting traders to bet on further aggressive easing by the Federal Reserve.

Money markets are now expecting another 100 bps of easing from the Fed by next week taking the benchmark policy interest rates to zero after a hefty half point rate cut last week.

"The market was looking for more," said Moh Siong Sim, currency strategist at the Bank of Singapore.

The Japanese currency climbed 0.5% versus the greenback to 103.98 yen, below a four-year high of 101.28 hit on Monday. The Swiss franc climbed but then fell and was last down 0.2% at $0.94.

Risk aversion was the dominant theme in currency markets on Thursday as Asian and European stock markets were a sea of red, forcing traders to stampede out of currencies heavily geared to the global economy such as the Norwegian crown and the Australian dollar.

Trump announced on Wednesday a ban on travellers from 26 European countries entering the United States for a month.

He unveiled economic steps to counter the virus but his address from the Oval Office was light on medical measures beyond assurances that "the virus has no chance against us".