Euro heads lower to 28-month lows as ECB inches towards quantitative easing

[December 19, 2014]  By Anirban Nag
 
 LONDON (Reuters) - The euro fell towards recent 28-month lows against the dollar on Friday, as the European Central Bank moved towards a fully-fledged government buying program to kickstart the economy.

Reuters reported on Friday that ECB officials were considering ways to ensure weak countries that stand to gain most from money printing bear more of the risk and cost. The ECB declined to comment.

Separately, data showed combined direct and portfolio investments into the euro zone fell to 53 billion euros in October, from 62.6 billion a month ago <ECONEZ>, indicating another support for the euro was waning.

The euro fell to $1.2253 <EUR=>, close to 28-month lows of $1.2247 struck on Dec. 8.

"The current measures from the ECB, like the targeted long term refinance operations, are falling short in helping the balance sheet size increase to 1 trillion euros," said Alvin Tan, currency strategist at Societe Generale.

"So the ECB will have to buy government bonds and we are expecting them to announce that in January."

In contrast to the ECB, the Federal Reserve is expected to start raising interest rates in the second half of next year. The gap between U.S. two-year bonds <US2YT=RR> and their German counterparts <DE2YT=RR> hit its highest in almost eight years and underpinned the dollar. <.DXY>

Traders said the Swiss National Bank's decision to implement negative deposit rates on the day the ECB next meets on Jan. 22 had also triggered talk that the ECB could take action then.

"While our longer-term euro/dollar target of $1.12 for end- 2015 is based on existing policy, quantitative easing (QE) by the ECB is likely to see this target achieved more rapidly," Morgan Stanley said.

YEN WEAKENS

Earlier, the yen fell on expectations of further stimulus next year to bolster Japanese inflation and also on a revival of global risk sentiment after battered oil prices and Russia's rouble stabilized.

The dollar gained 0.4 percent against Japan's currency to buy 119.35 yen <JPY=>, while the euro rose 0.2 percent to 146.30 yen <EURJPY=>.

The Bank of Japan kept monetary policy unchanged at the end of its two-day meeting on Friday, as expected, and offered a more upbeat view on the economy, signaling that no immediate expansion of stimulus was on the horizon.

BoJ chief Haruhiko Kuroda said Japan was still halfway towards meeting an inflation goal of 2 percent and policymakers would do anything necessary to achieve it. In October, the BoJ surprised markets by expanding its QE program, sending the yen to multi-year lows.

(Editing by Andrew Roche)

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