Euro Slides on Periphery Bonds’ Slump; Dollar Climbed

by on October 16, 2014 5:06 pm BST

The euro fell as a rout in bonds from the region’s periphery bolstered speculation the European Central Bank will expand stimulus that tends to depress exchange rates in order to quell the turmoil.

The dollar climbed versus most of its peers with growth in the U.S. forecast to outpace Europe and Japan, and on speculation the worst slump against the yen in 15 months yesterday was overdone. The yuan rose to the strongest in seven months as the U.S. said China has shown “some renewed willingness” to let it appreciate.

The euro slid 0.6 percent to $1.2766 at 10:47 a.m. New York time after climbing 1.4 percent yesterday, the steepest gain since July 2013. It retreated 0.2 percent to 135.66 yen. The dollar rose 0.3 percent to 106.24 yen after falling as much as 1.7 percent yesterday, the worst intraday decline since July 2013.

Bond markets in the so-called peripheral nations slumped as euro-area finance ministers clashed with Greece’s leaders over their plan to leave its bailout, sparking concern that the nation won’t be able to finance itself at sustainable rates without the support of its regional partners.

Greece’s 10-year yield jumped 111 basis points, or 1.11 percentage point, to 8.96 percent after rising 85 basis points yesterday. Spain’s 10-year yield climbed six basis points to 2.17 percent. Even France (GFRN10) wasn’t immune to the selloff, with that nation’s 10-year yield increasing 12 basis points to 1.26 percent.

ECB President Mario Draghi in Washington said on Oct. 11 that the central bank will use further unconventional monetary policy instruments if needed to support a recovery. The ECB has already implemented a negative deposit rate, offered cheap loans to banks and unveiled a plan to buy asset-backed securities.

JPMorgan Chase & Co.’s Global FX Volatility Index increased to 8.56 percent, the highest since Feb. 6. The measure has increased from 5.28 percent in July, the lowest on record.
Fed Speculation

Speculation the U.S. central bank will raise rates next year had led to a record rally in the U.S. currency. The advance started to reverse last week after minutes of the Sept. 16-17 Federal Open Market Committee meeting showed participants said expansion “might be slower than they expected if foreign economic growth came in weaker than anticipated.”

The currency plunged yesterday as a bigger-than-forecast drop in retail sales prompted traders to push back bets the Fed will raise interest rates until the end of next year.

In a twice-yearly report to Congress on foreign exchange, the U.S. Treasury Department said changes to China’s currency policy remain incomplete and the Asian nation should allow the market to play a greater role in setting the yuan’s value. The report covering the first half of this year concluded that no country was designated a currency manipulator.