SINGAPORE, Apr 24: The euro languished near a two-week low against the dollar on Wednesday, having suffered a setback after disappointing economic news out of Germany fuelled talk of an interest rate cut by the European Central Bank.
The euro held steady at $1.3000, not very far from a two-week low of $1.2973 hit on Tuesday in light of a survey showing a sharp drop in German business activity in April.
The Munich-based Ifo think tank’s survey of German business morale for April due later on Wednesday is the market’s next focus.
‘If the Ifo is weak that could provide further data-based validation for the recent speculation that there might be a rate cut in May,’ said a trader for a Japanese bank in Bangkok, referring to market chatter about a possible ECB rate cut.
‘If it turns out to be weak, the market reaction could be pretty large,’ the trader said, adding that market players seemed to be focusing on signs of economic weakness in Germany.
The downbeat reading of German business activity in Markit’s flash composite Purchasing Mangers’ Index (PMI), released on Tuesday, had driven projections of key euro zone bank-to-bank Euribor lending rates for 2015 and 2016 to record lows, as traders increased bets that the ECB may cut interest rates and keep them low for a long time.
In addition, recent comments from European Central Bank policymakers about falling inflation and poor growth prospects in the euro zone suggested the central bank may be leaning towards a cut in its main refinancing rate, which stands at a record low 0.75 percent.
One factor that may temper any market reaction in the event of a weak Ifo reading is the fact that the euro has already priced in the possibility of an ECB rate cut to some degree, said Mitul Kotecha, Hong Kong-based head of global foreign exchange strategy for Credit Agricole.
‘Markets have moved around to the view that the ECB will cut rates. We’re looking for a cut in May. So to some extent the euro is pricing that in,’ Kotecha said.
‘The momentum I still think is for a lower euro, but I don’t see a slide in the currency,’ he said, adding that one possible short-term support for the euro lies at the April 8 intraday low of $1.2962.
Against the yen, the euro eased 0.1 percent to 129.20 yen .
The dollar eased 0.1 percent to 99.42 yen, having pulled back from the day’s high of 99.77 yen.
The trader for a Japanese bank in Bangkok said yen-buying by options players, institutional investors as well as Japanese exporters blocked the dollar’s earlier rise and kept it from reaching the elusive 100 yen level.
The greenback had scaled a four-year high of 99.95 yen earlier this month after the Bank of Japan unveiled its sweeping monetary stimulus programme.
The Australian dollar fell 0.2 percent to $1.0250 after softer-than-expected inflation data encouraged investors to wager on a further cut in Australian interest rates.
The New Zealand dollar found support after the Reserve Bank of New Zealand gave a relatively upbeat assessment on the economy.
As expected the RBNZ left interest rates at a record low 2.5 percent and said they would stay there for the rest of the year.
The kiwi gained about 40 pips on the back of the RBNZ comments. The New Zealand dollar last stood at $0.8439, off a three-week low of $0.8360 plumbed Tuesday. (AGENCIES)
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