Euro weakens as investors raise bets on imminent ECB rate cut

A new €10 banknote is pictured during its presentation at the Austrian national bank in Vienna January 13, 2014. — Reuters pic
A new €10 banknote is pictured during its presentation at the Austrian national bank in Vienna January 13, 2014. — Reuters pic

LONDON, July 19 — The euro fell against a rebounding US dollar today and hit a 2-year low versus the Swiss franc, as investors ramped up bets for a European Central Bank interest rate cut as early as next week.

Money markets are now pricing in a roughly 60 per cent chance of a 10 basis point rate cut next week, versus a 40 per cent chance earlier in the week.

The euro’s drop reversed some of its gains in the previous session when dovish comments from a key Federal Reserve policymaker bolstered expectations of an aggressive interest rate cut this month, hurting the dollar

Rabobank analyst Jane Foley said ECB President Mario Draghi had surprised the market with dovish comments twice already in 2019, although her bank’s base case was still for a September cut.

“An ECB move would be more likely to have a shock impact... A 25 basis point cut by the Fed is priced in,” she said, adding that euro/dollar could test US$1.11 (RM4.56) or even US$1.10 if the ECB did lower rates.

The euro was 0.4 per cent lower at US$1.1231.

Against the Swiss franc it touched a two-year low of 1.1033 francs per euro, down 0.3 per cent on the day. The franc, viewed as a safe haven, has benefitted as investors grow nervous about the euro zone economic outlook.

Central banks are launching another round of policy easing in an attempt to lift stubbornly low inflation and fight signs of an economic slowdown.

At a conference yesterday, New York Fed President John Williams argued for pre-emptive measures to avoid having to deal with too-low inflation and interest rates.

The dollar dropped before rebounding slightly after a New York Fed representative subsequently said Williams’ comments were not about immediate policy direction.

Investors are now pricing in a roughly 40 per cent chance of a 50 basis point cut in US rates later this month, although the dollar has held up reasonably well as investors bet other central banks will ease policy too.

The dollar index, which hit a two-week low of 96.648 yesterday, was 0.2 per cent higher at 96.988.

Expectations of a dovish shift in the rate cycle have boosted emerging market currencies.

MSCI’s emerging market currency index on Friday hit a four-month high.

“We stay bearish on the US dollar but put most focus versus high carry emerging market currencies, helped by global central bank easing,” Morgan Stanley analysts said in a note.

The yen dropped against the dollar, falling 0.3 per cent to 107.66

Sterling was on the back foot again, falling 0.2 per cent to US$1.2527 and undoing some of its recovery on Thursday when British lawmakers voted for a plan to make it harder for a new prime minister to push through a no-deal Brexit.

The New Zealand dollar, which has rallied more than 1 per cent to a 3-1/2 month high this week as investors expect Fed rate cuts to boost the attractiveness of the higher-yielding kiwi, eased 0.2 per cent to US$0.6769.

The currency has the second-highest bond yield among G10 currencies after the US dollar. — Reuters