Euro at 11-week lows on subdued economy, inflation

[May 15, 2014]  By Anirban Nag

LONDON (Reuters) — The euro extended losses to 11-week lows against the dollar and the yen on Thursday, after subdued euro zone growth and inflation data bolstered expectations the European Central Bank will ease policy at its meeting next month.

The euro lost 0.4 percent to $1.36505, its lowest since February 27 and retreating further from a 2 1/2-year high of $1.3995 struck only last week. Against the yen too, the euro lost 0.4 percent to trade at 139.11 yen, its lowest in 11 weeks.

The euro zone economy expanded only 0.2 percent in the first quarter rather than the 0.4 percent expected by economists, the EU's statistics office estimated.

"The ECB has so many options on the table for June that it is difficult to go and buy the euro," said Ian Gunner, portfolio manager at Altana Hard Currency Fund. "But another rate cut will definitely not be good enough."

Reuters on Wednesday quoted sources as saying the ECB is preparing a package of policy options for its June meeting. They include cuts in all its interest rates, plus measures aimed at boosting lending to small and mid-sized firms.

ECB Executive Board member Yves Mersch said on Thursday that the central bank's toolbox included a negative rate on bank deposits and other measures.

Dankse Bank analysts said a new round of cheap longer-term loans to banks and a small-scale asset purchase program could be measures added to a rate cut. These will increase the supply of euros and drive down the currency's value.

SWISS FRANC WEAKER

The euro rose to a six-week high against the Swiss franc on speculation that the Swiss National Bank might lift the floor on the euro/Swiss franc pair to 1.25 francs or perhaps even 1.30. The SNB did not comment.

That rise would be in response to unconventional easing by the ECB in June. As a result, the euro rose to a high of 1.2230 francs, up 0.2 percent on the day.

The dollar was flat against the yen at 101.95 yen after losing 0.35 percent on Wednesday, tracking a fall in U.S. Treasury yields. It fell to the day's low of 101.66 yen after a report showed Japan's economy grew in the January-March quarter at its fastest pace more than two years, but the decline was short-lived.

"Strong economic indicators tend to be associated with expectations of Bank of Japan foregoing further easing, so there may have been a knee-jerk reaction," said Kyosuke Suzuki, director of forex at Societe Generale in Tokyo.

"But there are firm bids for the dollar in the middle 101-yen range and participants are wary of that too, keeping movements confined in range."

(Additional reporting by Shinichi Saoshiro in Tokyo; Editing by Larry King, John Stonestreet)
 

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