The euro dropped to a three-week low against the US dollar on Wednesday after European Central Bank president Mario Draghi said the eurozone economic outlook is subject to downside risks, leaving the door open for more policy action. The euro came under pressure as Draghi's dovish comments contrasted with minutes from the US Federal Reserve's March policy meeting, released on Tuesday, that showed US policymakers were less keen on adding monetary stimulus as the American economy improves.
Draghi's comments, which came in a news conference after the ECB, as expected, announced it was holding interest rates at 1.0 percent. With the US economy improving, US short-term rates could start rising before those in the eurozone, removing a key weakness for the US dollar.
The euro is down 1.5 percent against the dollar this week, its worst three-day fall since March 2. After breaking below its 100-day simple moving average at $1.3155, a bearish sign, analysts are watching $1.31 for signs of support. Chris Fernandes, vice president, senior foreign exchange advisor for the capital markets division at Bank of the West in San Ramon, California, said he expects a downward test of the EUR/USD's recent range of $1.3000-$1.3500.
"That's because expectations of a third round of Fed quantitative easing have receded and Spain remains an area of concern in regards to their ability to achieve their deficit targets." The US monthly payrolls and unemployment report due Friday report may cause EUR/USD to break below $1.3000 if payrolls rise by 200,000 or more, he said. Prior to the comments from ECB's Draghi, the euro was already under pressure after Spain's borrowing costs jumped at a bond auction.
In the options market, three-month risk reversals in euro/dollar showed a bias for euro put options, reaching session low volatities of -2.28 on Wednesday versus -1.75 on Tuesday. While euro options look biased towards the downside longer term, there was some buying of call options for June on Wednesday, according to Matthew Schilling, a broker at RJO FUTURES in Chicago.
The euro last traded at $1.3142, down 0.7 percent on the day against the dollar. The session's trough of $1.3105 was its lowest since March 16. Implied volatility on three-month euro/dollar options, a gauge of expectations regarding a currency's price action, rose to a three week high of 10.45 percent. It was at 9.95 percent on Tuesday.
The common currency also struggled against the yen, falling more than 1.0 percent on the day to 107.88 yen, its lowest since March 13. It was last at 108.32, down 1.1 percent. The yen regained ground against the dollar after coming under heavy selling pressure following the Fed minutes and the spike in US Treasury yields. The greenback was last down 0.5 percent on the day at 82.42 yen, retreating from a session high of 82.93 yen.
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