US$ strengthens; euro falls ahead of ECB meeting

London

THE US dollar strengthened on Thursday, reversing its weakening trend of the past seven days, while the euro slipped ahead of a European Central Bank (ECB) meeting at which policymakers was expected to step up stimulus measures.

The ECB was expected to increase the size of its 750 billion euro (S$1,182 billion) Pandemic Emergency Purchase Programme (PEPP) to support Europe's weakest economies - although some expected this to happen at July's meeting instead.

At the meeting, the ECB announced that it would raise bond purchases by 600 billion euros to 1.35 trillion euros and that purchases would run at least until end-June 2021, six months longer than first planned.

It also said it would reinvest proceeds from maturing bonds in the PEPP at least until the end of 2022.

The euro has gained around 3.6 per cent versus the US dollar since France and Germany proposed an European Union-wide recovery fund to share the cost of the novel coronavirus crisis on May 18. But on Thursday it changed course, falling 0.3 per cent to US$1.1202 by 1025 GMT.

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Kenneth Broux, FX strategist at Societie Generale, said it was consolidating recent gains as the market waited to see the outcome of the ECB meeting. "The euro-dollar is overbought, technically, so there's a good reason to take a bit of profits," he said. "It does not mean that we can't go higher in the next week or two weeks or so."

Mr Broux also said that there was potential for market disappointment as the market expected the ECB to increase the PEPP programme.

One argument against the ECB announcing more policy easing on Thursday was the slow progress in the European Union (EU) effort to finalise its recovery fund proposal. The ECB could hold out to keep up pressure on EU political leaders.

"For EUR, the direct implications of increasing the size of the PEPP are limited, but combined with the developing recovery fund, the implied improvement in the responsiveness of policy is positive," said Adam Cole, chief currency strategist at RBC Capital Markets. But Commerzbank's FX and EM analyst Thu Lan Nguyen said that any further gains for the euro could be limited by a large amount of positive economic news already being priced in by investors.

ECB president Christine Lagarde scotched speculation that the bank could follow the US Federal Reserve in buying sub-investment grade bonds, saying that option was not even discussed by policymakers. REUTERS