The euro’s 25% jump against the yen over the past six months underscores the rising pressure on European Central Bank President Mario Draghi to cut interest rates as the region’s exporters lose out to Japan.
Futures traders are adding to bets that the ECB will lower its benchmark rate in the months ahead to weaken the currency, while economists now predict a quarter-point reduction at next week’s policy meeting. Even that may not be enough to stoke “real growth,” said Bill Gross, who runs the world’s largest bond fund at Pacific Investment Management Co. He expects a drop in the euro and advised investors yesterday to sell.
Draghi’s dilemma is that while his pledge last year to keep the currency union intact succeeded in boosting confidence, it also contributed to a euro so strong that it’s hurting competitiveness. A report showed that German business confidence fell for a second month in April, after data yesterday indicated euro-area services and factory output shrank for a 15th month.
“Draghi is aware of the slowdown we’re starting to see,” said Gavin Friend, a currency strategist at National Australia Bank Ltd. in London and the most accurate forecaster on the euro versus the yen in the first quarter. “Now we’re getting negative on the euro zone and negative on the euro. The market is starting to look toward the next meeting and the prospect of a rate cut. It’s going to be volatile from here on.”
Economists watch the euro’s exchange rate against the yen because some of the region’s biggest exporters, including carmakers Daimler AG of Germany and PSA Peugeot Citroen of France, compete with the Japanese for sales into the U.S. and China.
In a mark of the struggle they face, shares of Toyota Motor Corp., Japan’s biggest automaker, have climbed 40% this year while Daimler’s fell 1.9%. Peugeot Chief Financial Officer Jean-Baptiste de Chatillon said today that exchange rates held back the Paris-based company’s first-quarter revenue by about 2%.
The euro rose 0.1% to 129.37 yen as of 8:27 a.m. in New York, after climbing to a three-year high of 131.12 yen on April 11. Against the dollar, it was little changed today at $1.2996, holding above its 52-week low of $1.2043 in July.
Central-bank officials “have to find ways to avoid that the euro appreciates and actually try to make it depreciate,” former ECB Executive Board member Lorenzo Bini Smaghi said in an interview on “Bloomberg Surveillance” with Sara Eisen and Tom Keene on April 17. While the ECB doesn’t target exchange rates, “they are important for price stability and for growth,” Draghi said on April 19 in Washington.