Euro holds near 7.5-year high vs yen before ECB decision time

THE euro held near its highest point in 7.5 years versus the yen on Thursday (Jun 9) before a potentially pivotal European Central Bank (ECB) rate decision, with policymakers expected to announce an end to the bank’s multi-year monetary stimulus.

The ECB is all but certain to flag an end to its long-running asset purchase programme at the end of this month, and promise an interest rate hike for July, but the size and pace of its tightening are uncertain.

A hawkish US Federal Reserve and soaring inflation has upped the pressure on Frankfurt to raise rates, with markets expecting more than 135 basis points (bps) of cumulative rate hikes by end of the year.

“Should the ECB decide to bring forward the timing for tightening policies, then we can expect more substantial gains for the single currency,” said Ricardo Evangelista, a senior analyst at ActivTrades based in London.

In contrast, the Bank of Japan (BOJ) has been relatively sanguine about the yen’s drop. Governor Haruhiko Kuroda said on Wednesday that the yen weakening was positive to the economy as long as moves were stable, while adding that foreign exchange policy was not the authority of the BOJ.

The euro was trading at 142.76 yen, just below a January 2015 high of 144.25 yen that was reached on Wednesday. The Japanese currency has weakened more than 4 per cent versus the euro so far this month.

Against the US dollar, the yen extended its slide, falling to a fresh 20-year low of 134.56 yen per US dollar in early trade before recovering to 133.79.

It is not far from the 135.20 hit on Jan 31, 2002, and a break past that would be its lowest since October 1998.

“You’ve got essentially a hawkish ECB versus an extreme dovish Bank of Japan, and from that you’ve seen a fantastic, beautiful trend ... If you get anything vaguely hawkish today then I think euro/yen is going to be the better long over euro/dollar because you’ve got more of a divergence between the central banks,” said Matt Simpson, senior market analyst at City Index in Sydney.

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The BOJ allows Japan’s benchmark 10-year bond yield to move up to 0.25 percentage points from its 0 per cent target, and it was last at 0.249 per cent.

In contrast, Germany’s 10-year yield, the benchmark for the euro area, rose to a new eight-year high above 1.37 per cent on Thursday before the ECB rate decision. The gap between the German and Japanese benchmarks grew to its widest in 9 years on Thursday..

Elsewhere, the US dollar index was broadly steady at 102.64. REUTERS