QE back in focus turns rally of euro and yen into two-day wonder

[TOKYO] The possibility of further quantitative easing in Europe and Japan has returned to investors' radar screens, reining in this week's rallies in the euro and yen.

The euro fell as much as 2 per cent versus the dollar Wednesday after European Central Bank Executive Board member Peter Praet said the ECB was willing to expand its asset-buying program as the outlook for inflation may have worsened. The yen remained weaker Thursday after Bank of Japan Governor Haruhiko Kuroda said the central bank has "many options" should it need to bolster easing as he monitors risks from volatility in global financial markets.

The euro and yen surged to seven-month highs against the dollar on Monday as the global market rout, triggered by China's surprise currency devaluation, reduced the chances the Federal Reserve will increase its benchmark rate next month. China's central bank cut lending rates Tuesday, and policy makers in other countries are set to follow, according to Greg Gibbs, director of Amplifying Global FX Capital.

"After the pushback on the US rate hikes, the market is refocusing on the prospect of more QE, more global policy easing basically - in China and in other countries - that will help stabilise global asset prices and improve the global economic outlook," Mr Gibbs said in an interview in Singapore.

The euro may drop more than 10 cents from now to reach parity with the greenback next year, he said. The shared currency climbed 0.3 per cent to US$1.1350 at 7:24 am in London, paring a two-day, 2.7 per cent slide. It reached US$1.1714 Monday, the strongest level since January.

"If the euro was to stay around US$1.15, you'll probably see its economy slow down, the inflation situation will deteriorate," said Mr Gibbs, a former strategist at Royal Bank of Scotland Group Plc. "The market will then start to factor in more QE activity." Japan's currency was little changed at 119.89 per dollar. It's shed 1.3 per cent since Monday when it surged 3.1 per cent and touched 116.18, the strongest since Jan 16.

"Sustained moves below 120 could bring more QE or policy actions by the BOJ over a six-month time frame," Mr Gibbs said. "Dollar-yen could go up to 122, 123 in a calmer scenario." Expectations of further policy easing aren't confined to the ECB and BOJ. The Monetary Authority of Singapore is likely to widen its policy band at its next scheduled meeting in October because of slowing growth, a low inflation rate and the global market rout, Nomura Holdings Inc. analysts, including Craig Chan, the head of Asia ex-Japan foreign-exchange strategy, wrote in a research report dated Aug 26. The MAS guides the Singapore dollar against an undisclosed currency basket and adjusts the pace of appreciation or depreciation by changing the slope, width and center of a band.

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