Euro slides to six-week low on Draghi comments

The euro (FOREX:EURUSD) declined to a six-week low versus the dollar as European Central Bank President Mario Draghi said officials discussed an interest-rate cut at today’s policy meeting.

The 17-nation currency also weakened against the yen as Draghi, speaking after the ECB kept borrowing costs at a record- low 0.5%, said he would consider a further reduction if money market rates climbed too high. The dollar strengthened through 100 yen for the first time since July on speculation signs of improvement in the U.S. economy will compel the Federal Reserve to taper stimulus as early as this month. Sweden’s krona fell as the central bank kept its main lending rate unchanged.

“Draghi’s comments are clearly dovish, putting some immediate downward pressure on the euro,” said Bernd Berg, a currency strategist at Credit Suisse Group AG in Zurich. “Draghi has said that the monetary policy stance remains dovish for an extended period of time despite some economic pick-up we are recently seeing in the euro zone.”

The euro slipped 0.6% to $1.3125 as of 10:26 a.m. New York time after reaching $1.3120, the weakest since July 19. The dollar strengthened 0.4% at 100.11 yen after climbing to 100.15, the most since July 25. The euro depreciated 0.3% to 131.39 yen.

Draghi is trying to convince markets that he will keep interest rates low for an extended period to support the euro area’s recovery from its longest-ever recession. Rate expectations have risen close to levels that he described last month as “unwarranted,” suggesting some investors are questioning his promise.

Growth Forecasts

While the ECB today raised its forecasts for the euro area’s economic growth this year, it cut the projection for 2014. Gross domestic product will climb 1% next year, the ECB said, compared with a 1.1% increase forecast previously.

“The downward revision to 2014 growth suggests the ECB as a whole is looking through a lot of the recent upside in the data, and cuts were hinted at today,” said Stephen Gallo, European head of currency strategy at Bank of Montreal in London. “The Fed is moving towards taper, and other major central banks are doing what they can to resist the upward pressure on rates.”

The Institute for Supply Management’s non-manufacturing index rose to 58.6 in August from 56 the prior month, a report from the Tempe, Arizona-based group showed today.

The median forecast in a Bloomberg survey called for a drop to 55. A reading greater than 50 indicates expansion in the industries that make up almost 90% of the economy.

Payrolls Report

The ADP Research Institute said U.S. companies added 176,000 jobs last month, following a revised 198,000 increase in July. The median forecast of 43 economists surveyed by Bloomberg called for an August advance of 184,000.

A separate report showed fewer Americans than forecast filed applications for unemployment benefits last week. Jobless claims declined by 9,000 to 323,000 in the week ended Aug. 31, less than the lowest estimate of economists surveyed by Bloomberg, from a revised 332,000, according to Labor Department data issued today in Washington.

U.S. nonfarm payrolls rose by 180,000 in August while the jobless rate held at 7.4%, the lowest since December 2008, Labor Department data will show tomorrow, according to a separate Bloomberg survey.

Fed Tapering

Fed policy makers are debating whether the economy is strong enough to allow them to pare monthly purchases of $85 billion in Treasuries and mortgage debt, which tend to debase the dollar. A Bloomberg News survey of economists taken Aug. 9-13 showed that 65% of them expected a reduction at the Fed’s meeting on Sept. 17-18.

The dollar has strengthened 5.8% this year, according to Bloomberg Correlation-Weighted Indexes. The yen has fallen 9.7% and the euro has risen 5.3%.

“The outlook for the U.S. economy and monetary policy will have a big impact over the dollar in the medium to long term,” said Yuki Sakasai, a foreign-exchange strategist in New York at Barclays Plc. “Our view remains that the Fed will decide to taper easing in two weeks.”

The Bank of Japan, which buys more than 7 trillion yen of Japanese government bonds every month in its bid to stoke inflation to 2%, kept its policy on hold today. The BOJ said a moderate recovery is under way. BOJ Governor Haruhiko Kuroda said economic growth will exceed potential even with a planned increase in sales tax.

Pound Climbs

The pound reached a four-month high versus the euro as the Bank of England held its bond-purchase target at 375 billion pounds ($584 billion). The decision was predicted by all 38 analysts in a Bloomberg survey. Policy makers also kept the key interest rate at a record-low 0.5%.

The pound appreciated 0.3% to 84.24 pence per euro after reaching 84.08, the strongest level since May 6.

India’s rupee advanced for a second day versus the dollar. In his first briefing after taking office, Reserve Bank of India Governor Raghuram Rajan announced a plan yesterday to provide concessional swaps for banks’ foreign-currency deposits, a move that will boost the authority’s reserves by $10 billion, according to Bank of America Merrill Lynch.

The rupee traded 1.5% stronger at 66.115 per dollar after climbing as much as 2.3% to 65.53, prices from local banks compiled by Bloomberg show.

Sweden’s krona declined versus all of its 16 major peers as the nation’s central bank stuck to a plan to raise borrowing costs late next year. The krona dropped 1.3% to 6.6723 per dollar after reaching 6.6779, the weakest level since July 16. The Turkish lira weakened to a record-low 2.0841 per dollar.

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