Euro drops to seven-month low as Draghi feeds bears; New Zealand dollar falls

[SYDNEY] The euro weakened toward a seven-month low after futures traders added to bearish bets and European Central Bank President Mario Draghi encouraged speculation his board will ease policy next week.

Europe's common currency dropped versus all its major peers on Friday after Mr Draghi said the ECB will do what they must to raise inflation "as quickly as possible." The Governing Council meets in Frankfurt on Dec 3 for its next monetary-policy decision.

Hedge funds ramped up wagers on dollar strength last week by the most since August 2014. The New Zealand currency led declines Monday against the greenback on rising speculation the South Pacific nation's central bank will cut interest rates.

"It's probably reasonable to think we can spend time down below US$1.05 now," for the euro, said Ray Attrill, co-head of currency strategy at National Australia Bank Ltd in Sydney. "It looks to me like we're building up into a fairly classic sell the rumour, buy the fact."

The euro slid 0.3 per cent to US$1.0614 at 9.55am in Singapore Monday from US$1.0646 on Friday, when it dropped 0.8 per cent. It touched US$1.0609, the lowest since April 15. The shared currency traded at 130.63 yen after declining 0.9 per cent to 130.77 at the end of last week. The dollar rose 0.3 per cent to 123.13 yen.

New Zealand's dollar weakened 0.7 per cent to 65.20 US cents. Swaps traders increased the odds the Reserve Bank of New Zealand will cut its benchmark interest rate next month to 55 per cent, from 46 per cent a week ago, according to data compiled by Bloomberg.

"A mix of US dollar strength and rising expectations of more RBNZ rate cuts" dragged the kiwi lower, said Elias Haddad, a currency strategist at Commonwealth Bank of Australia in Sydney.

"The accumulation of unimpressive New Zealand economic data and declining dairy prices are weighing on short-term swap rates." New Zealand's currency will depreciate to 59 cents by the middle of next year, he said.

The Aussie dollar retreated on Monday after back-to-back weekly gains amid concern the currency isn't reflecting a slide in prices of iron ore, Australia's chief export. The currency depreciated 0.7 per cent to 71.91 US cents following a two- week, 2.8 per cent advance.

Japanese markets are shut for a holiday.

SPECULATIVE POSITIONS

Large speculators increased bets that benefit from a decline in the euro to a net short of 164,177 contracts, the most since June, in the week through Nov. 17, data from the Commodity Futures Trading Commission showed on Friday. The net long position in the dollar versus eight major peers climbed by 92,293, the data show.

Mr Draghi said last month that ECB policy makers would review the degree of monetary stimulus at their December meeting.

Since then, the euro has weakened about 6 per cent versus the dollar as traders increased bets that officials may extend the bond-buying programme or further cut the deposit rate.

In contrast, there was a 68 per cent probability seen on Friday that the Fed will raise the benchmark rate at its December meeting, according to futures data compiled by Bloomberg.

The calculation assumes the effective fed funds rate averages 0.375 per cent after the first increase.

The euro is now pricing in a cut in the deposit rate and some "intensification" of quantitative easing, NAB's Attrill said.

"There is a chance that the ECB could underwhelm expectations next week now." Goldman Sachs Asset Management reduced a position betting the euro would decline against the dollar "as central bank actions are increasingly priced in to both markets," it said in a note issued to clients.

BLOOMBERG