Euro strengthens against dollar after ECB dashes dovish hopes

NEW YORK (Reuters) – The euro jumped half a percent against the dollar on Thursday after the European Central Bank refrained from hinting at an interest rate cut and instead pushed back the timing of its first rate hike since the 2008 financial crisis.

The euro rose because investors had expected an even more dovish signal from the ECB and an acknowledgement of weak economic growth in the bloc.

“One of the more dovish outcomes we envisaged did not materialize. The (ECB) governing council extended its forward guidance timing, but also under-delivered on the TLTRO front,” TS Securities told clients.

The ECB said it would lend to banks at a rate just 10 basis points above its minus 0.4% deposit rate in a new targeted longer-term refinancing operation, or TLTRO.

Money market futures are now pricing in a 45% chance of a 10 basis point euro zone rate cut by the end of year versus 75% before the ECB statement.

The euro has strengthened recently on the back of dollar weakness caused by rising bets on a U.S. interest rate cut.

The ECB “is taking a more proactive approach, rather than the wait-and-see approach you’re seeing from the Fed,” said Minh Trang, senior foreign exchange trader at Silicon Valley Bank.

That has led the euro to rally and the dollar to fall because “if (the Fed) is behind the curve, they’ll have to make more drastic moves if the economy turns on them,” said Trang.

“If you look at the last six months, (the Fed) has been behind the curve. The market began pricing in a (U.S.) rate cut six months ago.”

The single currency was 0.47% higher at $1.127 after brushing a 1-1/2-month high of $1.131 earlier this week.

The dollar index fell to a two-month low of 96.749 midweek on investor risk aversion and dovish comments from members of the Fed, including Chair Jerome Powell, that heightened prospects of an interest-rate cut.

Japan’s yen on Thursday strengthened 0.22% to 108.22 per dollar, after a lack of progress in U.S.-Mexico trade talks hurt risk sentiment and drove investors to safe-haven currencies.

U.S. President Donald Trump unexpectedly told Mexico last week to take a harder line on curbing illegal immigration or face 5% tariffs on all its exports to the United States.

The Mexican peso, already weighed down by trade concerns, took a hit after credit ratings agency Fitch downgraded the country’s sovereign debt on Wednesday to BBB from BBB+, just two notches above junk status.

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