Sunday 17 December 2017

ECB expectations put pressure on euro

European Central Bank (ECB) President Mario Draghi
European Central Bank (ECB) President Mario Draghi

The dollar reached an 8 1/2-month high against a basket of currencies on Monday, as the prospect of further stimulus this week from the European Central Bank drove the euro to its lowest since April.

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Before the expected announcement of its joining the IMF's basket of reserve currencies, China's yuan gained around 0.4 percent offshore amid talk of intervention by Beijing to tighten the spread between on- and offshore rates.

The main focus for markets this week will be a series of central bank meetings, chiefly the ECB's on Thursday, when it is widely expected to cut interest rates on euro deposits and extend its quantitative easing programme.

By contrast, the Federal Reserve is expected to raise U.S. rates for the first time in almost a decade later in December.

"It certainly looks like the euro will trade heavier into the ECB meeting," said a dealer with one international bank in London. "Despite the bank's efforts to push the euro lower so far, we could still see a significant knee-jerk on Thursday."

The euro fell a third of a percent to $1.05645, just below last week's low of $1.0565.

It is down around 4 percent for the month and more than 12 percent in 2015 so far. But dealers, analysts and investors are divided on how far it will fall this year towards parity with the dollar.

"We are probably with the consensus, the Fed is going to tighten, the ECB is going to ease, so the euro will go lower to about 1.05 and then that will be your lot (for the year)," said Sanjiv Shah, chief investment officer with Sun Global in London.

"Everybody knows that the ECB is going to do something and the Fed as well. If it was going to go to $1 it would have gone already. Probably in the first quarter of next year we will see an attempt on parity."

The dollar index added about 0.1 percent to 100.16 after earlier rising as high as 100.23, closing in on a 12-year high of 100.39 set in March.

It was up more than 3 percent for the month and nearly 11 percent for the year.

Soft inflation readings for the euro zone on Monday and Tuesday may strengthen expectations for ECB action at its Dec. 3 meeting, but whatever the outcome, an easing appeared to be fully factored in.

A U.S. payrolls report on Friday should cement expectations that the Fed will move. Net bets on dollar appreciation rose to their highest in eight months in the week to last Tuesday. They are still only around 60 to 70 percent of highs hit in March and April.

Speculation was rife that the Swiss National Bank had intervened last week to weaken the franc. Sight deposits at the SNB held steady last week, offering no indication of a rise that would point to intervention, although that may be offset by the usual rise in cash circulation around the holiday season.

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