Euro declines as cooling inflation gives ECB scope for easing

The euro fell versus the dollar, extending its first monthly drop since July, amid Italian political wrangling about forming a government and as cooling regional inflation opens the door for central bank stimulus.

The 17-nation currency weakened against most of its major peers as European Central Bank President Mario Draghi signaled at an event in Munich late yesterday that the bank has no intention of tightening monetary policy anytime soon. The U.S. economy barely expanded in the fourth quarter, erasing a previously estimated contraction. The rand fell 1.7% against the greenback as South Africa posted a record trade gap in January.

“You have a lot of uncertainty in Europe right now, concerns regarding political gridlock in Italy, and also concerns about growth in the euro zone,” Sireen Harajli, a foreign-exchange strategist in New York at Credit Agricole SA, said in a telephone interview. “Those definitely have been limiting any gains in euro, which is contrary to what we saw earlier this year.”

The euro weakened 0.5% to $1.3079 at 10:46 a.m. New York time and is down 3.7% this month. It lost 0.4% to 120.71 yen, set for a 3.1% drop in February. The dollar rose 0.1% to 92.30 yen.

Winners, Losers

Brazil’s real has gained 0.7% to the greenback and South Korea’s currency is up 0.5% in February, the biggest gainers of the dollar’s 16 most-traded peers, according to data compiled by Bloomberg. The pound lost 4.4%, the biggest decline, while Norway’s krone weakened 4.4%.

This year, the real has strengthened 3.6% as the pound has lost 6.7%.

“The pound had enjoyed a haven premium for a long time, despite the disconnect in its underlying fundamentals,” said Noel Hebert, chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management LLC, which oversees about $250 million. “With the relative stabilization of the euro, or at least the belief that sovereign holdings will be made money good by the ECB, you removed the technical bid.”

Britain’s economy shrank in the fourth quarter as exports fell and an uncertain outlook depressed company investment. The subdued outlook prompted Bank of England Governor Mervyn King and two other policy makers to vote for more quantitative easing this month.

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