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Euro heads for second month of losses

Friday, August 29 09:02:22

The euro was on track for a second straight month of losses on Friday, with selling likely to accelerate if data show euro zone inflation has slowed further, making it more likely the ECB will loosen policy.

The euro was trading near a one-year low against the dollar, a 21-month low against the Swiss franc and a two-week low against the pound and the yen. The losses drove the euro trade-weighted index to its lowest since July last year.

With euro zone bond yields also near record lows and overnight inter-bank lending rates trading below zero for the time ever, rate differentials were moving against the single currency.

The euro was trading at $1.3165, down 0.1 percent on the day, not far from the one-year low of 1.31525 it struck on Wednesday.

The single currency has lost more than 2 percent in the past two weeks. One reason was the conflict in Ukraine and Russia, which is likely to weigh on growth in the euro zone. Another was ECB President Mario Draghi's dovish speech last Friday.

Draghi said the ECB was prepared to respond with all its "available" tools if inflation slows further. A report on August inflation is due at 0900 GMT, although stable German inflation data earlier made ECB action next week somewhat less likely.

Analysts polled by Reuters expect annual euro zone inflation slowed to 0.3 percent in August from 0.4 percent in July. That would be well below the ECB's danger zone of 1.0 percent and its target of just under 2.0 percent.

Any reading in line with forecasts or below them would heighten expectations of more monetary stimulus soon, which would weigh on the euro.

"Although elevated speculative short positioning is limiting euro/dollar downside, we still prefer selling the single currency against higher yielding currencies," said Manuel Oliveri, currency strategist at Credit Agricole.

Against the Swiss franc, the euro skidded as far as 1.2049 on Thursday, moving ever close to the 1.20 barrier that the Swiss National Bank has vowed to protect. It last traded at 1.2058, still down on the day.

In contrast to the euro zone, the U.S. economy rebounded more strongly than initially reported in the second quarter, revised data showed, and a bigger chunk of the growth was driven by domestic demand. The revision highlighted the difference in U.S. and euro zone monetary policy outlooks.

The euro's drop saw the dollar index rise to 82.541, back towards its 13-month peak of 82.727 hit on Wednesday.

The dollar also rose against the yen. It was trading firm at 103.80, though below a recent high of 104.49.

Japanese economic data had little effect on the yen. The reports showed a rise in the jobless rate and weaker-than-expected growth in industrial output.

"A rise in the jobless rate could undermine the BOJ's scenario that an improving job market boosts wages and inflation," said Minori Uchida, chief FX strategist at the Bank of Mitsubishi-Tokyo UFJ.

"The market appears not much interested in the Japanese economy now, but that may change towards the year-end as the government has to decide on whether or not it will go ahead with a tax hike planned next year," he added.

The Australian dollar, meanwhile, appeared to march to its own beat this month, rising against almost every other major currencies.

It has reached fresh 2014 peaks against the euro, yen and its New Zealand peer. Against the greenback, it was trading at $0.9357, having hit a three-week high of $0.9374 on Thursday. (Reuters)

For more visit www.businessworld.ie