Investors on Wednesday sent the euro to a nine-year low after data showed euro zone prices fell for the first time since 2009, increasing pressure on the European Central Bank to loosen monetary policy. Expectations the ECB will take bold action and flood the euro zone with cash in order to stimulate economic growth and inflation rekindled the winning trade of the last six months of selling the euro short on the expectation it will continue to lose value.
"The market is back to fully pricing in ECB easing at the end of the month. The inflation data didn't really alter the expectation of easing but it is like a final nail in the coffin on that argument," said Greg Anderson, global head of FX strategy at BMO Capital Markets in New York. "When we started this year, the risk off in equities and commodities caught people by surprise and they had to take profits on winning positions which was short euro. Now that we're clear of that, people are going to put back on those short euro positions," he said.
The euro fell as low as $1.18020 on the EBS trading platform, its weakest since January 2006. In afternoon trade it recovered slightly to $1.18440, a loss of 0.39 percent on the day. A rebound in global equity markets has undermined the safety trade of buying Japanese yen. The euro pulled up from a two-month low to trade at 141.060 yen, a gain of 0.22 percent.
At one point the dollar rose over 1 percent against the yen, pulling up from Tuesday's three-week low. It last traded around 119.075 yen, up 0.60 percent. The European statistics office reported euro zone inflation turned negative for the first time since 2009, with plunging oil prices driving a bigger-than-expected decline.
The dollar index, which measures the greenback against a basket of currencies, powered to a fresh nine-year high at 92.265 before settling back to 91.955, a gain of 0.50 percent. Minutes of the US Federal Reserve's December meeting released on Wednesday highlighted a central bank advocating a patient stance on monetary policy, but did not dissuade economists from sticking to a mid-2015 interest rate increase.
"(The Fed) will wait and see what the rest of the global picture looks like, particularly in co-ordination with some of the actions of the ECB. I still think it puts them in a mid-2015 time frame," said Jim Dunigan, chief investment officer of PNC Wealth Management in Philadelphia.
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