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.

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