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Euro drops versus US dollar, heads for second annual decline on QE

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The mood among German analysts and investors deteriorated in January, a survey showed on Tuesday as the ZEW think tank said a slowdown in China and other emerging markets was continuing to cloud the outlook for Europe's largest economy.

[NEW YORK] The euro fell versus the US dollar for the first time in four days, leaving the shared currency on course for a second year of losses, as diverging policies at the two economies' central banks drive foreign-exchange markets.

The 19-nation currency weakened against most of its 16 major peers as trading ebbed before the Christmas and year-end holidays.

The Federal Open Market Committee raised interest rates in December while the European Central Bank said its asset-purchase programme would run until at least March 2017. The diverging trajectories was on display Wednesday as data showed an increase in US consumer purchases in November, accompanied by rising wages.

"It's back to the divergence between the ECB and the FOMC in 2016," said Fabian Eliasson, head of US corporate foreign- exchange sales in New York at Mizuho Financial Group Inc.

"We have the first Fed rate hike behind us. The timing and the speed of any further rate hikes will determine the outlook of euro- dollar."

The euro fell 0.3 per cent to US$1.0922 at 3.57pm New York time. It has declined about 10 per cent this year after weakening 12 per cent in 2014. The common currency will probably fall to US$1.04 by the second quarter, according to a Bloomberg survey of analysts.

LOST GROUND

The dollar has lost ground in December. With a global economic recovery looking patchy and slumping commodity prices raising the specter of deflation, investors are pricing in a gradual pace of rate increases by the Fed.

The Bloomberg Dollar Spot Index, which tracks the US currency against 10 major peers, is poised for its worst month since June as traders estimate the probability of the Fed raising rates by April at about 56 per cent.

 "We are still bullish on the dollar and negative on the euro," said Richard Falkenhall, a trading strategist at SEB AB in Stockholm. "We expect further rate hikes from the Fed, but the key driver is that we expect the ECB to continue to ease monetary policy. They are not done yet."

BLOOMBERG