The euro flirted with a two-year trough against the dollar on Monday as investors bet that the European Central Bank would ease monetary policy more aggressively to ward off deflation in the stuttering euro zone.
On Friday, the ECB President, Mario Draghi, threw the door open for more drastic measures as he painted a bleak picture of the 18-nation euro zone, stressing that “excessively low’’ inflation had to be raised quickly.
Draghi’s comments saw the euro lose more than 1.2 per cent on Friday — its biggest daily fall in 2-1/2 months — and it dropped further in early Asian trading, hitting $1.2359, just a whisker away from a two-year low of $1.2358 plumbed earlier in the month. In European trading, the euro was flat at $1.2383.
Traders are now awaiting a German business sentiment report by the Ifo think-tank due at 0900 GMT, which they will scour for further signs of a slowdown in the euro zone’s biggest economy.
Ian Stannard, head of European FX strategy at Morgan Stanley in London, said that although Draghi had not said anything particularly new, the market had interpreted his comments as showing the ECB was committed to increasing its balance sheet by whatever means necessary.
“Over the course of the last couple of weeks we’ve had euro/dollar going sideways, but Draghi’s comments on Friday have put an end to that correction and the euro is going to come back under pressure," he said.
The dollar edged up 0.1 per cent to 117.95 yen. The greenback hit a seven-year high of 118.98 yen last week, having rallied roughly 10 yen since the Bank of Japan’s surprise monetary easing in late October.
But the dollar slipped against the yen on Friday after Japanese Finance Minister Taro Aso said the yen’s recent fall was “too rapid’’ and undesirable.
Dollar’s outlook against yen
A near-term focal point for the dollar's outlook against the yen will be possible comments from Japanese lawmakers on currencies and monetary policy ahead of an election in Japan next month, said Teppei Ino, an analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore.
The Swiss franc was flat against the euro at 1.2023 francs, having eased away from a 26-month high last week. Talk of intervention by the Swiss National Bank to defend its peg at 1.20 francs per euro grew after data showed the amount of cash commercial banks hold with the central bank jumped last week by 5 billion Swiss francs, the most since July 2013.