The euro slumped toward a seven-month low amid speculation the European Central Bank (ECB) will maintain its easy monetary policy, as the Federal Reserve (the Fed) prepares to raise interest rates this year.
The single currency slipped for a third week, after ECB President Mario Draghi said on October 20 that neither tapering nor an extension of the bank’s bond-buying plan were discussed at its two-day policy meeting. The euro weakened for a fifth day, the longest losing streak since May, as expectations fade that the region’s central bankers back a sudden end to quantitative easing after March, which is the latest date that they’ve committed to for the program. Speculators have increased their bearish-euro bets to the most since July.
“The euro is coming under pressure from monetary-policy divergence as the ECB looks set to prolong its accommodative stance, while the Fed is probably paving the way for a December rate hike,” said Jun Kato, a senior fund manager in Tokyo at Shinkin Asset Management. The US “is at least resilient relative to other regions and that’s supporting the dollar.” The euro slipped 0.2 percent to $1.0865 as of 11:35 a.m. in Tokyo from Friday, when the currency touched $1.0859, its lowest since March 10. It was little changed at ¥112.96. The dollar gained 0.2 percent to ¥103.96.
San Francisco Fed President John Williams said on Friday he’d support one rate increase in 2016 and a few more next year. Williams, who doesn’t vote on Fed policy this year and won’t until 2018, said that he would have supported a September rate increase. The market-based probability of a December hike was 68 percent as of Friday, up from 66 percent a week earlier.
Net short positions on the euro increased to 109,268 contracts in the week ended October 18, compared with 93,472 in the previous period, according to the Washington-based Commodity Futures Trading Commission. It’s the largest bearish position since July 26.
The single currency is set to slide toward $1.06 within the next seven weeks, according to Macquarie Bank Ltd. ECB policy-makers next meet on December 8. “The euro should stay heavy into the December ECB meeting,” said Gareth Berry, a foreign-exchange and rates strategist in Singapore at Macquarie. “Draghi seems intent on extending the QE program beyond March at the current pace” of €80 billion ($87 billion) per month.