The euro hit a one-week low against the dollar last week after a report from Reuters that the European Central Bank was considering purchasing corporate bonds which highlighted the diverging policy outlooks for the U.S. and the Eurozone.
The euro fell to as low as $1.27025 on trading platform EBS in European trade which was its lowest level since last week. It was last seen standing at $1.2717 with very little change on the day and still stood very weak after a 0.7 % fall last week.
Sources told Reuters that the ECB was considering purchasing corporate bonds on the secondary market in a last ditch effort to augment the flailing Eurozone economy and would very well start purchasing bonds by next year.
The move should it materialise would expand the private sector asset-purchasing programme which the ECB began last week when it commenced in buying covered bonds in a bid to foster lending to business in the hope of stimulating growth.
The general takeaway is for most people to show commitment from the ECB in trying to find ways to expand its balance sheet.
Fresh ECB easing can restore the interest rate gap between the U.S. and Europe in order to lighten the burden of underpinning the dollar.
For all the minor uncertainties regarding the edges of the FOMC (Reserve’s rate-setting committee) policy partiality, people still recognise that the U.S. economy is way ahead of the ECB and that on a multi-quarter basis that would be indicative that the euro/dollar should go lower.
The dollar rallied in the past three months to September on a view that a much higher U.S. interest rates down the road would attract funds from the Eurozone and Japan where the rates are likely to remain low.
The Fed is expected to wind up its $4 trillion bond-purchasing programme at its upcoming policy meeting next week and Fed officials are also discerning to make rate hikes although they are likely to wait several months before beginning the tightening cycle.
Although some Fed officials flagged a possible global slowdown as a threat to an increased interest rate, solid earnings from the U.S. tech firms and U.S housing data were very positive and less troublesome in terms of economic figures from China helped ease the problems.
The improved risk appetite reduced the requirement for speculators to hold on to the low-yielding yen which is more often utilised as a safe-haven currency. The dollar is now being traded at 106.90 yen flat last week on the trading day.
The dollar index, which basically tracks the greenback against a basket of major currencies, was up 0.1 % at 85.390.
Minutes from the BoE
The next focus in the European trading is on the minutes from the latest policy of the BoE wherein traders might possibly begin to rinse from their present historic lows. The poor inflation and wage growth data last week moved investors to push back their respective bets on time for an expected U.K. rate hike into the second half of the year. Sterling fell ahead of the minutes, which was last seen traded at $1.6074, down 0.3 % on the day.
Discussions among analysts that another member of the MPC might possibly swing to vote for a higher rate has dissipated. Two members had backed at a rate rise at the recent meeting but there is now speculations that they might consider changing their minds.
U.S. CPI data is a major focus in which economists expect a yearly core CPI inflation to remain flat at 1.7 % but a softer reading might undermine the dollar by adding to the speculation that the Fed could no longer wait any more in raising their rates.
Finally, the CPI data is very crucial. If the market turns risk-off, money will then flow back to U.S. bonds. With such a weak and frail figure, it will definitely have negative repercussions to the dollar.