currencies treaded water on Wednesday with traders looking ahead to a
meeting of the European Central Bank on Thursday that could set the tone
for markets after the sharp moves in the wake of last month’s U.S.
elections.
The ECB
is widely expected to announce an extension to its quantitative easing
program, but uncertainty reigns over whether the size of the monthly
asset purchases will be kept steady or scaled back, and over whether a
formal signal on the eventual end of the asset-purchase program will be
sent.
If the ECB does say it will start to reduce its
asset purchases – so-called tapering – the euro would probably rebound
following a 4 percent fall against the dollar EUR= over the past month, analysts said.
On Wednesday the European single currency edged
up 0.2 percent to $1.0734. It had slumped on Monday to $1.0505, its
lowest since March 2015, in a knee-jerk reaction after Italian Prime
Minister Matteo Renzi lost a referendum on constitutional reform and
said he would resign.
But the euro quickly jumped back to a
3-week high of $1.0797 on the same day as a worst-case political
scenario for Rome appeared to have been averted for the time being, and
as investors turned their attention to the ECB.
“People
had gone into the referendum with a very pessimistic view and I think
the last five years have taught us that, as far as the euro is
concerned, political issues often don’t have a lasting impact,” DZ Bank
currency analyst Sonja Marten said in Frankfurt.
The dollar was flat at 114.03 yen JPY=,
not far off the peak of 114.83 hit last week, its highest against the
Japanese currency since early February. The greenback has surged over 10
percent against the yen in the past month.
Bank
of Japan Deputy Governor Kikuo Iwata said on Wednesday that the central
bank had not shifted its focus away from the pace of money printing and
stressed it remained committed to using both rate cuts and asset
purchases as key tools to revive the economy.
“The
Fed is hiking rates, the ECB might extend the duration of its
program…, but the next big thing is going to be tapering,” said
Marten. “There’s a general move away from adding onto expansionary
measures. So the central banks that continue to signal that they are
willing to do that stand out.”
“FISCAL LARGESSE”
Against a basket of
currencies, the dollar edged down 0.1 percent to 100.44 .DXY, having
poked above 102.00 to a 13-1/2-year high in late November as U.S.
Treasury yields soared on prospects of President-elect Donald Trump
adopting large fiscal spending and reflationary policies.
“While
we still think that the dollar could bounce further, especially in
2017, euro/dollar’s short-term direction will ultimately depend on what
the Fed has to say about the future direction of U.S. interest rates at
its meeting next week,” said Kathleen Brooks, research director at City
Index.
“If the Fed believes that
President-elect Trump’s fiscal largesse warrants a faster pace of rate
increases than is currently being priced in, then the market will rush
to price in higher yields, which will boost the dollar and weigh on
currencies like the euro.”
The
biggest mover among major currencies was sterling, which fell as much
as 0.8 percent to hit a one-week low of 85.255 pence against the euro
EURGBP=D4. It also slid half a percent against the dollar GBP=D4 after data showed British industrial output suffered its biggest monthly fall in more than four years.
The Canadian dollar was flat ahead of a Bank of Canada policy meeting that is expected to see interest rates left unchanged CAD=D4.
(Additional reporting by Shinichi Saoshiro in Tokyo; Editing by Mark Heinrich)
