Euro drops with yen on increasing bets for central bank stimulus

A sign outside a currency exchange in Hong Kong on Jan 12.
A sign outside a currency exchange in Hong Kong on Jan 12. PHOTO: BLOOMBERG

TOKYO (BLOOMBERG) - The euro and yen were set for their biggest weekly drops this year as traders braced for more stimulus measures after a global market rout strengthened the currencies.

The euro fell for a third day after European Central Bank President Mario Draghi said Thursday the central bank may reconsider its policy stance in March. Japan's currency weakened against the majority of its major peers this week on speculation the Bank of Japan is preparing to boost currency weakening stimulus as soon as next week.

The euro slipped 0.4 per cent to US$1.0834 as of 2:25 pmin Tokyo. It has declined 0.8 per cent this week, the most since the final week of 2015. The yen fell 0.2 per cent to 117.98 per US dollar. Japan's currency has weakened 0.9 per cent since Jan 15, the biggest drop since a 2 per cent decline in the week to Nov 6. It's still the best performer against the greenback among 16 major currencies this year and reached 115.98 on Wednesday, its highest since Jan 16, 2015.

Mr Draghi set the euro area up for expanded monetary stimulus for the third time in a year as China's economic slowdown and market volatility threaten to derail the region's recovery.

ECB policy makers will review their programs at the next policy session in March and there are "no limits" on how far they're willing to deploy measures within their mandate, Draghi said.

Concern about a slowdown in China's economy and oil prices tumbling to 12-year lows have triggered risk aversion, sending global equities tumbling this year and boosting the yen and euro as haven assets.

The yen's rise to a one-year high this week intensified talk of the BOJ having to add stimulus to counter the adverse impact of a stronger yen on the Japanese economy and the bank's 2 per cent inflation target. The Nikkei Asian Review reported that central bank Governor Haruhiko Kuroda is considering steps to counter the hit to inflation from crude's slide. The BOJ holds its policy meeting Jan 28-29.

Mr Kuroda, until now, has been resisting further expansion of the asset-purchase program since 2014, arguing that the repeated reductions in forecasts for consumer prices largely resulted from falling oil costs, which are beyond the central bank's influence.

"It's not clear to what extent BOJ speculation is helping the recovery in Japanese stocks and the weakening of the yen, as some remain doubtful of more easing next week," said Masafumi Yamamoto, chief currency strategist in Tokyo at Mizuho Securities Co. "Another slump in oil prices can easily wipe out these moves."