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Forex Betting: Euro Drops After ECB Hold Rates Remain Unchanged

Written by:
Reuters
Published on:
Aug/07/2014
Forex Betting: Euro Drops After ECB Hold Rates Remain Unchanged

(Reuters) - The euro weakened on Thursday, undermined by the European Central Bank's saying it would leave interest rates unchanged at record lows and that the fragile economic recovery will keep the loose policy in place for an extended period.

The ECB's decision was not unexpected by the market, and it heightened the contrast in monetary policy, with the euro zone moving toward easing and the United States moving toward tightening on an improving economic outlook.

The positive sentiment on the U.S. economy was helped by better-than-expected weekly U.S. jobless claims. 

Since May, the euro has dropped 4.6 percent against the dollar, hitting a 9-month low of $1.3333 on Wednesday.

"Nothing really has changed here with the ECB and since that's the case, we're simply consolidating the prices," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

"The bigger risk in the market is the downside for the euro. I think it bears out Draghi's point in that the market already accepts (Europe's) economic recovery is fragile, moderate and uneven," he added, referring to comments from ECB President Mario Draghi earlier on Thursday.

Following the bank's monetary policy meeting, Draghi said the Ukraine crisis has added to risks of the euro zone's weak and uneven economic recovery.

In mid-morning New York trade, the euro touched a session low at $1.3336, off 0.30 percent on the day.

The greenback rebounded from Wednesday's 1-1/2 week low against the Japanese yen, which sagged on news that Japan's public pension fund plans to increase allocation to the domestic stock market. The dollar rose 0.24 percent to 102.34 yen.

After a bullish month of trading that raised expectations of a longer-lasting rally, the greenback was just below 11-month highs against a trade-weighted basket of major currencies.

YEN AND AUSSIE FALL

The yen, attractive for investors seeking shelter from growing tensions between the West and Russia, weakened as Tokyo shares pushed higher. Sources told Reuters that Japan's Government Pension Investment Fund plans to put over 20 percent of its funds in domestic stocks. That compares with a current 12 percent target.

Gains in equities tend to weigh on the safe-haven yen, as investors target riskier assets on expectations of making bigger returns.

"It is that news on the GPIF that has moved dollar-yen this morning," said Daragh Maher, a currency strategist with HSBC in London. "We had some peculiar price action late yesterday that is also being retraced, but the GPIF story gave a fundamental rationale for the push higher."

The Aussie fell after unexpected jump in Australia's jobless rate, dropping 0.9 percent to $0.9268, having earlier hit $0.9263, its lowest level since early June.

(Reporting by Daniel Bases; Additional reporting by Patrick Graham in London, Masayuki Kitano in Singapore, and Ian Chua in Sydney; Editing by Dan Grebler)

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