The euro fell on Thursday to an almost two-year low against a dollar that is on track for its longest winning streak since the early 1970s, as investors anticipate that European and US monetary policy will head in opposite directions. The gap in bond yields between 10-year US Treasuries and German Bunds, the euro zone benchmark, traded near 15-year highs, luring investors to buy dollars, on expectations of higher US interest rates.
As the US economy picks up, the Federal Reserve is likely to end its bond-buying next month - introduced under a quantitative easing (QE) policy to tackle the financial crisis - and will probably begin raising the cost of borrowing next year. By contrast, the European Central Bank is likely to ease its ultra-loose monetary policy yet further, and may resort to buying government debt to revive a stuttering euro zone economy and avert a lapse into deflation. So far, the euro's weakness has not led to protests from policymakers across the world, given they are aware that the ECB has few other alternatives other than a weaker currency to bolster the economy.
The dollar is on track for its 11th successive weekly rise, something it has not achieved for four decades, in sharp contrast to prospects for the euro and the yen. The Bank of Japan is likewise grappling with a flagging economy which it is trying to pull out deflation. ECB President Mario Draghi has stoked expectations of further action to revive the region's economy. He told Lithuanian business daily Verslo Zinios that the ECB, which meets next week, was ready to use additional unconventional instruments or change the size of current asset purchase programmes if it became necessary to address risks of very low inflation.
"ECB President Mario Draghi continues to beat the QE drums ... so (it is) hardly surprising that euro/dollar is trading at even lower levels this morning," said Esther Reichelt, currency strategist at Commerzbank. The euro fell to $1.26955 on trading platform EBS, its lowest since November 2012. This helped to push the dollar index, which measures it against a basket of major currencies, to a four-year high of 85.485.
Many big banks and investment houses had forecast a broad rise for the dollar this year. But it has taken a long run of relatively good US economic statistics for the currency to gather steam. Data on Wednesday showed sales of new US single-family homes surged in August to their highest level in more than six years. On the same day, German data showed business sentiment fell in September for the fifth straight month, reaching its lowest level in nearly 1-1/2 years.
The dollar also pressed higher against the yen to reach 109.375, not far from last week's six-year peak of 109.46. It was last up about 0.2 percent at 109.26 yen. The dollar's surge led to a sharp drop in commodity-linked currencies. They have been under pressure due to worries about Chinese economic growth and falling prices of leading commodities from iron ore to coal. Emerging market currencies also took a hit.
One of the biggest movers was the New Zealand dollar. It fell after Reserve Bank of New Zealand Governor Graeme Wheeler said the level of the currency, known as the kiwi, was unjustified and unsustainable. The New Zealand dollar, the 10th most traded currency globally, fell below 80 US cents for the first time since September 2013. It dropped as far as $0.7948, down 1.6 percent on the day.
"The comments are both another indirect verbal intervention to talk down the kiwi and also a clear signal that the RBNZ is moving closer to direct intervention to weaken the kiwi. In these circumstances the kiwi is likely to remain on the defensive," Bank of Tokyo Mitsubishi said in a note. The Australian dollar also dipped to an eight-month low of $0.8792, down 1 percent on the day. The Aussie has fallen more than 5 percent this month against the greenback, a magnitude not seen in more than a year.
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