Euro continues descent ahead of ECB meeting
- Article by: PAN PYLAS
- Associated Press
- September 2, 2014 - 9:25 AM
LONDON — The euro fell to a one-year low against the dollar on Tuesday as it continued to lose support from speculation that the European Central Bank could start pumping money into the ailing eurozone economy to spur growth.
The bank, which oversees monetary policy for the 18 countries that use the euro, is under pressure to do more at its meeting on Thursday to get the economic recovery across the 18-country eurozone back on track and inflation back toward its target.
The prospect that it could start a program that would create more euros has been weighing on the currency for weeks. Figures from the U.S. Commodity Futures Trading Commission have shown trades selling the euro are at a near-record, meaning there is a risk of the currency snapping back higher if the ECB fails to back up its recent talk of stimulus with action.
On Tuesday, the euro fell to $1.3110, its lowest level since the $1.3103 it struck on Sept. 6, 2013.
Though the existential crisis surrounding the eurozone has diminished since ECB President Mario Draghi pledged in 2012 to do "whatever it takes" to save the euro, the eurozone economic recovery has been muted.
In fact, in the second quarter of this year, the recovery ground to a halt as the eurozone recorded zero growth largely as a result of problems in large economies such as Germany, Italy and France. Though the crisis in Ukraine has been blamed for much of the slowdown — particularly in Germany, Europe's largest economy — by hurting investor confidence, it's clear that the region's underlying economic momentum is fading. The eurozone now faces the prospect of an unprecedented triple-dip recession.
Further weighing on the outlook has been a sharp fall in inflation. In August, prices were only 0.3 percent higher than the year before, way short of the ECB's target of just below 2 percent. The worry is inflation may become deflation — a bout of falling prices that can choke growth as consumers delay spending in the hope of bargains down the line and businesses fail to innovate.
That's why the ECB is under pressure to do more than it already has. In June, it cut its main interest rate to a record low of 0.15 percent. Draghi has also said more monetary stimulus —such as quantitative easing, or QE — is possible. Such a program would inject new money into the economy in the hope of lowering market interest rates.
"It's a close call," said Gary Jenkins, chief credit strategist at LNG Capital. "If they do not announce QE then I expect Draghi to be aggressively dovish. He will make it clear that it is within their mandate and could be unleashed at any time."
The possibility of more euros being created has been one of the main reasons why the currency has been in retreat since early summer, when it was knocking on the $1.40 door.
The fall has been a boon to policymakers across Europe as well as to the region's exporters. A falling currency can spur inflation by making imports more expensive — potentially nudging up inflation, to the ECB's relief — and it can boost growth by making euro-denominated exports cheaper in the international marketplace.
Some analysts cautioned about the impact of a failure by the ECB to act on Thursday, especially as CFTC figures show investors have sold the euro in near-record amounts. Those trades could easily be unwound if Draghi and the ECB's governing council decide to stay pat.
"There is a clear risk that this eagerly-awaited meeting could have rather untoward consequences if it does not go to the euro bears' plan," said Neil Mellor, a senior currency strategist at Bank of New York Mellon.
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