Euro sees biggest monthly loss since March amid ECB outlook

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(Bloomberg) -- The euro posted its biggest monthly decline since March as economists unanimously forecast the European Central Bank will unveil additional monetary stimulus this week.

The 19-nation currency slid to the weakest level since April versus the dollar as investors fully priced in a 10-basis- point cut to the ECB’s deposit rate on Dec. 3. Almost 80 percent of respondents to a Bloomberg survey said the central bank, led by President Mario Draghi, will prolong its asset-purchase program beyond the initial end date of September 2016. Other policy options include increasing the monthly amount of purchases and expanding the range of assets that are targeted. 

A gauge of the dollar climbed to the highest since March as futures signal the Federal Reserve will increase interest rates in December, expanding the policy divergence between the Fed and ECB.

"It looks like the market has priced in a triple ease -- cutting the central bank rate plus increasing the amount of quantitative easing, plus increasing the time span of quantitative easing," said Greg Anderson, global head of foreign-exchange strategy in New York at Bank of Montreal. "On the opposite side of it, we went from ‘It looks like the Fed’s going to do nothing in 2015’ to ‘Oh my gosh, the Fed’s going to tighten in December.’"

The euro fell 0.3 percent to $1.0565 at 5 p.m. in New York after touching $1.0558, the lowest since April. The currency weakened 4 percent in November, its biggest loss since a 4.2 percent decline in March, when the ECB embarked on its 1.1 trillion-euro ($1.2 trillion) asset-purchase program.

The shared currency may weaken to $1.04 in the near term, although this will be a difficult level to break through, said Alvin T. Tan, a London-based strategist at Societe Generale SA. From a risk-reward perspective there is “not much point jumping on the bandwagon here,” he said.

The dollar added 0.3 percent to 123.11 yen, extending this month’s advance to 2.1 percent, the most since May. The U.S. Dollar Index, which tracks the greenback against six major peers, gained 0.2 percent to 100.22 and earlier rose to 100.31, the highest since March 13.

Commodity currencies including the Australian and New Zealand dollars posted the biggest gains against the dollar, with the kiwi rising as much as 0.8 percent against the greenback during intraday trading. The Aussie might have benefited from a bounce in the price of gold, said Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York.

"You obviously have ECB later in the week and lots of people talking about even more QE, which is always good news for risky assets," Franulovich said.

Deposit Rate

The ECB is forecast to boost stimulus even though the institution is less than halfway through its bond-buying program. More than three-quarters of respondents surveyed by Bloomberg said the ECB will cut its deposit rate from the current minus 0.2 percent.

“The euro has moved as expectations of ECB easing have mounted,” SocGen’s Tan said. “It’s clear the market is expecting more than a 10 basis-point deposit-rate cut, so probably the ECB will deliver at least 20 basis points of rate cut, plus further enlargement of the asset-purchase program to even move the needle"

Options traders have been cutting positions that would benefit from a weaker euro. The premium on one-month contracts giving the right to sell the shared currency over those to buy narrowed to 0.39 percentage point Monday, from as wide as 1.16 percentage points on Oct. 23, data compiled by Bloomberg show.

Fed Chair Janet Yellen is scheduled to address the Economic Club of Washington on Dec. 2 and appear before a congressional committee on Dec. 3, a day before the Labor Department publishes its monthly payroll report for November. Futures indicate a 74 percent chance the Fed will raise its benchmark rate in December, according to data compiled by Bloomberg.

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