Euro falls against dollar on speculation ECB may take radical measures to combat deflation

Monday 03 February 2014 18.57
Investors are betting ECB president Mario Draghi may have to take radical measures to prevent deflation
Investors are betting ECB president Mario Draghi may have to take radical measures to prevent deflation

The euro hit a two-month low against the dollar as expectations grew of radical European Central Bank action to combat slowing inflation.

Emerging market gloom helped push the US currency down versus the yen.

The euro, which fell on Friday after weaker-than-forecast inflation data from the currency bloc, also hit a two-month low against the yen and dropped to its lowest in more than six weeks against the Swiss franc.

The euro fell as far as $1.34765, its weakest since late November. It later recovered some ground to trade up 0.2% at $1.3519.

Euro zone inflation for January showed a surprise drop to 0.7% year-on-year. Analysts had expected prices to rise 0.9%.

With the ECB's main interest rate already at a record low 0.25%, some analysts expect the central bank to start buying sovereign bonds to loosen monetary conditions.

"What really matters is deflation," said Hans Redeker, head of global currency strategy at Morgan Stanley. "The euro is going to find it very difficult to hold its value.

"I think that with a ... fall in inflation and the development of deflation expectations the only credible instrument is outright QE (quantitative easing). It's not the best tool, but there's no other tool available."

The common currency fell to 137.38 yen, facing the risk of settling below its 100-day moving average, now at 137.54, which some chartists regard as a bearish signal. It later recovered to 137.61 yen, down 0.1 percent on the day.

The dollar dropped to as low as 101.7 yen, its weakest since early December as investors stayed wary of emerging economies and sought shelter in the Japanese currency.

A sharp sell-off in emerging currencies in recent days has supported the yen broadly.

With trading volumes still subdued after Friday's Lunar New Year holiday in Asia, investors were looking to US manufacturing purchasing managers' (PMI) data later today for direction on the strength of the U economy. Jobs data, which was unexpectedly weak last month, follows on Friday.

The US PMI and payrolls data could signal the economy is growing fast enough for the Federal Reserve to keep cutting back its bond-buying programme - a move that could encourage investors to pull money from emerging markets and to put it into US bonds. 

Keywords: dollar, ecb, euro