The euro surged to the strongest since October 2011 against the dollar (FOREX:EURUSD) after European Central Bank Governing Council member Jens Weidmann said keeping interest low may endanger political reforms.
The common currency advanced versus all except two of its 16 major counterparts as Weidmann was cited by Germany’s Bild newspaper as saying low inflation shouldn’t be used to justify loose monetary policy. The yen dropped to the weakest since October 2008 against the euro as Asian and European stocks advanced, reducing the haven appeal of the Japanese currency. Turkey’s lira slumped to a record amid concern a showdown between the government of Prime Minister Recep Tayyip Erdogan and the judiciary will worsen.
“The euro is trading to new highs since late 2011 on a Weidmann interview, in which he talks up the risks of ‘arbitrary monetary policy easing’ and the need to hike rates quickly if inflation returns,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Copenhagen. “Illiquid holiday trading” is magnifying the extent of the moves, he said.
The euro jumped 1.1% to $1.3845 at 7:40 a.m. in New York after rising to $1.3893, the highest level since Oct. 31, 2011. The single currency gained 1.2% to 145.20 yen after reaching 145.69, the strongest since October 2008. The dollar was little changed at 104.89 yen.
The common currency has appreciated 9.1% this year, the best performer of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar advanced 3.4 9%, while the yen tumbled 16%.
“We must take care to raise interest rates again in a timely manner should inflation pressures build,” Weidmann was quoted by Bild as saying. “The euro area is recovering only gradually from the most severe economic crisis in the postwar period; pricing risks are slight. That justifies low benchmark rates,” he said.
The euro was also boosted as the region’s stocks extended this week’s gains. The Stoxx Europe 600 Index rallied for a sixth day, advancing 0.7%.
The dollar fell for a third day against the euro amid speculation the Federal Reserve is still a long way from raising interest rates even after starting to reduce asset purchases that have debased the currency.
“The Fed did decide to taper, but the amount was minimal and we have yet to see what the policy outlook will be going forward,” said Marito Ueda, senior managing director at currency-margin company FX Prime Corp. in Tokyo. “Some bets on dollar gains are being unwound into year-end. The dollar is being sold across the board.”
The Fed said last week it will cut monthly asset purchases in January to $75 billion from $85 billion. Policy makers will reduce bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, economists said in a Bloomberg survey published Dec. 19.
The lira tumbled for a third day amid a showdown between the government and judicial powers.
Turkish markets are being roiled by a corruption probe that ensnared Prime Minister Recep Tayyip Erdogan’s cabinet and led to three ministerial resignations and the dismissal of some 500 police chiefs. Istanbul Prosecutor Muammer Akkas wrote in a written statement yesterday that he’d been pulled off an investigation into businessmen and officials for involvement in bribery, rigging tenders and fraud.
“There’s zero predictability,” Cuneyt Paksoy, an investment committee member at Rhea Portfolio Management in Istanbul, said today by phone. “The market is questioning the anchor of political stability, which was the key driver for Turkey’s lift to investment grade.”
Turkey’s currency slumped 2% to 2.1695 per dollar after dropping to an all-time low 2.1764. The lira weakened to a record 3.0151 versus the euro.