The euro fell to a five-week low against the dollar on Thursday after the European Central Bank chief flagged downside risks to euro zone growth prospects and said interest rates could be lowered. The euro fell to $1.2883, down 1 percent, after ECB President Mario Draghi said interest rates are expected to remain at present or lower levels for an extended period in forward guidance to markets. His comments came after the ECB left interest rates on hold, as expected.
Euro zone money market and bond yields fell, leading to differentials between US 10-year Treasuries and similar dated German Bunds widening to their highest since April 2010. That reflected a widening chasm between the ECB and the Federal Reserve monetary policy outlooks and is likely to see the euro drop to $1.28 and below. In sharp contrast to the ECB which discussed a rate cut, the Fed has signalled it is prepared to unwind some of the monetary stimulus in coming months. That is likely to bolster the dollar, traders said.
"These comments from Draghi are clearly euro negative and we see it drop below $1.28 in the next few days," said Chris Turner, head of FX strategy at ING. While the euro fell sharply against the dollar and the yen, it held its ground against the British pound. Sterling slid to a one-month low against the dollar of $1.5060 and a 2-1/2 month trough versus the euro of 86.34 pence after the Bank of England expressed concern about rising bond yields.
The BoE left policy unchanged on Thursday, but in a surprise move said the implied rise in the expected future path of interest rates was not warranted by the state of the economy and could weigh on the growth and inflation outlook. "We remain bearish sterling targeting the low $1.40s and see euro/sterling holding the mid-80s," said George Saravelos, currency strategist at Deutsche Bank.
Volumes were light due to a public holiday in the United States. Some investors were wary of taking big positions before monthly US jobs data on Friday, which would lift the dollar if it was strong. The euro's and sterling losses pushed the dollar index, which measures the US currency's value against a basket of currencies, to a one-month high of 83.911.