The euro slumped for a second straight day against the dollar in volatile trade on Thursday after European Central Bank President Mario Draghi dashed hopes of immediate action to remedy the region's debt crisis. Investors had high expectations headed into the ECB meeting after Draghi last week fuelled speculation of further bank purchases of Italian and Spanish bonds when he said he would do "whatever it takes to preserve the euro."
But Draghi sent no signal of near-term action. Instead, he said the ECB will draw up plans in the coming weeks to make outright bond purchases to stabilise euro zone borrowing costs. The single currency shared by 17 countries briefly catapulted to a four-week high of $1.2404 against the dollar on Reuters data after the ECB announcement, but swiftly tumbled to a one-week low of $1.2132 as investors digested the news.
The euro's nearly 3 cent decline marked the biggest one-day price move since August 8, 2011. "After Draghi's comment last week there was a lot of hope that the ECB would do something more dramatic today, without conditions, which clearly did not happen," said Jens Nordvig, global head of currency strategy at Nomura Securities in New York.
At a press conference after the ECB's decision to keep interest rates at 0.75 percent, Draghi said the ECB would only act after euro zone governments have activated bailout funds to do the same and any intervention would depend on troubled countries making a request and accepting strict conditions and supervision. "Countries such as Spain will not be inclined to apply immediately for help, so we have a period of instability ahead of us," he said. "The ECB will not get ahead with this policy."
Investors will now focus on Friday's US nonfarm payrolls report, which could create another day of volatile trading. Stephen Jen, hedge fund manager at SLJ Macro Partners in London, said he approves of the ECB's decision. "In contrast to the Fed, the ECB took the opportunity to actually exert more pressure on the governments to do more, as a pre-condition ... for the ECB to join in," he said. "At the end of the day, we all know that what the ECB might do will only buy time."
The ECB will probably begin buying Italian and Spanish bonds in September, when it is also likely to cut its main refinancing rate to a new record low of just half a percent, a Reuters poll found on Thursday. The euro last traded at $1.2178, down 0.4 percent. Against the yen, the euro slid as low as 94.90 yen and last traded down 0.7 percent at 95.24 yen. It also hit a record low against the Australian dollar around A$1.1600. "History will be more kind to the ECB than to the Fed, I think," Jen said. "The market demanded short-term fixes, but did not get it."