The euro experienced a one-week low against the dollar last week after reports that the European Central Bank was contemplating purchasing corporate bonds, stressing the diverging policy outlook for the United States and Eurozone.
The euro declined to as low as $1.27025 on trading platforms in the EBS European trade which was its lowest level since last week. It was last seen standing at $1.2717 which had very little change on that day and was still sluggish following a 0.7% fall last week.
Reports that the ECB was considering purchasing corporate bonds on the secondary market in a last ditch effort to augment the waving Eurozone economy and possibly begin its bond purchases early next year.
The move, should it materialize, would expand the private sector’s asset purchasing program of the ECB when it started to buy covered bonds in a bid to advance lending to businesses in the hope of spurring growth.
The general carry off for most people is that it shows commitment from the ECB trying to find out more options to expand its balance sheet.
New ECB easing might possibly restore the gap in terms of rate between the U.S. and Europe in order to assist in underpinning the dollar.
For all the vague doubts surrounding the edges of the FOMC, the U.S. Federal Reserve’s rate-setting committee’s policy bias, people still consider that the U.S. economy in a few years will be ahead of the ECB and that a multi-quarter basis would indicate that the euro/dollar will succumb to depreciation.
The dollar was able to rally in the past three months on a view that higher U.S. interest rates down the road would entice funds from Japan and the Eurozone, where rates will most likely be maintaining a low position.
The Fed is expected to bolster its $4 trillion bond-purchasing program at its upcoming policy meeting with Fed officials seeking to hike its interest rates although they are prevented due to the long wait of a couple of months before beginning the tightening cycle.
While some Fed officials halted the possible global showdown as risk to interest rate rises, the earnings from U.S. tech firms were solid, U.S. housing data were optimistic and economic figures from China were alleviated to ease the concerns.
Improved risk appetite and the need for more speculators to hold on to the low-yielding yen was often used as a safe-haven currency, such that the dollar traded at 106.90 yen, flat on that particular day.
The dollar index, which monitors the greenback against the basket of major currencies was up 0.1% at 85.390.
Minutes from the BoE meeting
The next focus in European trading will be on the minutes from the Bank of England’s policy meeting wherein traders will search for any hints as to when interest rates might begin to rise from their respective historic lows.
The poor inflation and wage growth data that were seen last week drove investors to place back their bets on timing of an impending U.K. rate hike into the second half of next year.
Talks among analysts that another member of the nine-strong MPC possibly could swing its vote for higher rates has predominantly vanished. Although two members had supported a rate rise at the recent September meeting but there is now speculations that the same would vote otherwise.
Sterling fell ahead of the minutes which was seen trading at $1.6074, down 0.3% on the day.
The importance of the CPI data cannot be disregarded because if the market turns its risk-off, then money will flow to U.S. bonds. This frail figure will surely infringe the dollar. Moreover, the U.S. CPI data is a major focus this week as economists expect that annual core CPI inflation to stay stagnant at 1.7% but a softer reading might undermine the dollar by adding to speculations that the Fed might need to wait a little longer before raising rates.