Euro sell-off pauses; parity with dollar view intact

[March 12, 2015]  By Anirban Nag

LONDON (Reuters) - The euro rose against the dollar for the first time in two weeks on Thursday, recovering from a 12-year low struck earlier in the day, as a sustained sell-off in single currency paused for breath.

But traders said gains would be limited with investors looking to sell the euro at higher levels. Both technical indicators and options market pricing showed more losses are in store for the beleaguered currency which has hit a 13-year against a basket of currencies.

The one trillion euro bond-buying program the European Central Bank launched on Monday has dented the euro's appeal by driving yields of many euro zone bonds deeper into negative territory and others to all-time lows. A 30-year German bond  now offers a yield which is below a two-year U.S. Treasury note.

The euro fell as far as $1.0494, the lowest since Jan 2003, before recovering to trade at $1.0630, up 0.8 percent. Still, its recent sharp drop has triggered talk of parity with the dollar, a phenomenon last witnessed in 2002.

"There is a strong momentum for the euro to hit parity against the dollar. Portfolio diversification flows out of the euro zone into the U.S. and the U.K. should see the euro drop. Also the ECB will want a weaker euro to push up inflation," said Yujiro Goto, currency analyst at Nomura.
 

"So unless we get protests from other trading partners about a weakening euro, I think the trend will continue. There have been some noises from the U.S. but as long as the Europeans are happy with the currency weakness, the euro can go down further."

St. Louis Federal Reserve President James Bullard told the Financial Times it was not so clear that there will be big moves in the dollar in the near term. "A lot has been priced in at this point" in currency markets, he said, referring to the divergence in monetary policy between the Fed and the ECB.

The dollar index, which measures the greenback against major currencies hit 100.06 for the first time since early 2003, before dropping. It was last down 0.8 percent at 98.96.

Investors now await U.S. retail sales data later in the day to see if the figures can reinforce expectations of an interest rate hike by the Federal Reserve by mid-year. Due to the bitter cold weather, a pull-back is sales is expected, a factor that could weigh on the dollar, analysts said.

Meanwhile, the New Zealand dollar advanced after the Reserve Bank of New Zealand sounded less dovish than markets had positioned for and kept interest rates steady at 3.5 percent.

"When you look through the statement, the threshold for cutting the cash rate right now is perhaps a little bit higher than what markets have been anticipating," said Nick Tuffley, economist at ASB Bank.

The kiwi was at $0.7400, up 1.4 percent and pulling away from a five-week trough of $0.7192 struck on March 11.

(Additional reporting by Shinichi Saoshiro; Editing by Toby Chopra)

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