Euro drops to 2-month low as Draghi says growth to stay weak

November 8, 2012 04:10 AM

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The euro fell to a two-month low versus the dollar as the European Central Bank kept its benchmark interest rate at a record low and President Mario Draghi said economic growth was expected to remain “weak.”

The single currency declined against all except two of its 16 major counterparts after Market News International said the ECB was reluctant to start buying government bonds after a decline in borrowing costs. The yen advanced as investors sought safer assets amid concern re-elected U.S. President Barack Obama will struggle to avert the so-called fiscal cliff. The pound rose against the euro as the Bank of England refrained from boosting its asset-purchase program.

“The ECB decision not to cut cannot be a great surprise to the market, but perhaps some were flirting with the idea of an easing especially after Draghi’s comments yesterday,” said Daragh Maher, a currency strategist at HSBC Holdings Plc in London. “I suspect the market will be patient and hope the press conference gives us something more exciting, perhaps on Spain or Greece.”

The euro dropped 0.1 percent to $1.2754 at 8:58 a.m. in New York after sliding to $1.2717, the lowest level since Sept. 7. The common currency fell 0.3 percent to 101.83 yen after sliding 0.8 percent yesterday. The yen strengthened 0.2 percent to 79.86 per dollar.

Europe’s central bank left its benchmark interest rate at 0.75 percent at its policy meeting in Frankfurt today, as forecast by all except one of 63 economists surveyed by Bloomberg News.

‘High Uncertainty’

“Economic activity in the euro area is expected to remain weak,” Draghi said at a press conference following the decision. “The necessary process of balance sheet adjustment and high uncertainty continue to weigh on the economic outlook.”

The euro dropped in earlier trading as Market News reported the ECB was satisfied with the tranquilizing effect created by its plan to buy government bonds, citing unidentified European Union and central-bank officials. The common currency rallied in August and September amid speculation ECB bond purchases would cap borrowing costs for nations such as Spain and Italy and help contain the debt crisis.

German exports, adjusted for work days and seasonal changes, dropped 2.5 percent from August, when they gained 2.3 percent, the Federal Statistics Office said today. That’s the biggest slide since December. Economists surveyed by Bloomberg forecast a 1.5 percent decline.

EADS Earnings

Earnings forecasts released today by European Aeronautic, Defence & Space Co. suggest it anticipates the euro will strengthen. Europe’s biggest aerospace and defense company said its new hedge contract had an average rate of $1.29 per euro.

EADS, which hedges heavily to manage currency risk on future Airbus aircraft deliveries, takes a 1 billion-euro hit on earnings for every 10 cent increase in the euro against the dollar. One of the biggest problems for EADS is that most Airbus labor costs are in euros, but aircraft are paid for in dollars.

The euro has declined 1.1 percent over the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen dropped 1.4 percent, while the dollar gained 0.7 percent.

The yen rose against all 16 of its major peers as demand for the safety of Japan’s currency was boosted by speculation U.S. lawmakers will struggle to avert the looming fiscal cliff, the more-than $600 billion in tax increases and spending cuts set to be implemented in 2013 unless Congress acts.

‘Biggest Focus’

“The biggest focus of the market as we head into year-end will be the fiscal cliff,” said Noriaki Murao, managing director of the marketing group at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Investors are buying safe currencies such as the dollar and yen.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against currencies of six U.S. trading partners, climbed 0.1 percent to 80.796 after rising to 81.001, the highest since Sept. 7.

The pound rose for a second day against the euro after the Bank of England said it would maintain its asset-purchase target at 375 billion pounds ($599 billion). The decision was predicted by 35 out of 45 economists in a Bloomberg survey.

The central bank completed its latest 50 billion pounds of bond purchases last week, and Deputy Governors Paul Tucker and Charles Bean have indicated asset purchases may no longer have the same impact on the economy as when first introduced in 2009.

The pound appreciated 0.2 percent to 79.73 pence per euro after strengthening 0.3 percent yesterday. Sterling was little changed at $1.5998.

Bloomberg News

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