The euro skidded to two-month lows against the dollar on Friday, a day after the European Central Bank hinted at more stimulus in December, tipping the common currency into one of its biggest falls in recent years. The euro fell to as low as $1.1072 at one point in Asian trade, breaking below the $1.11 mark, which has been a major support for the currency in the last several weeks. It last traded at $1.1104.
ECB President Mario Draghi said on Thursday that the bank was studying new stimulus measures that could be unveiled as soon as December and was prepared to cut its deposit rate deeper into negative territory, effectively increasing the fees the ECB charges to take deposits of excess reserves. "Markets were expecting Draghi might suggest an extension of its quantitative easing but he went so far as discussing cutting the deposit facility rate," said a derivative trader at a Japanese brokerage.
"He came up with everything he can offer. It was like a pizza with the works." The shock was enough to send the euro down 2.0 percent overnight, its second largest fall since 2011, eclipsed only by the drop on January 22 this year when the ECB announced its current bond buying scheme. Trading volume on Thursday was also the biggest in a year. Against the British pound, the common currency fell to 72.05 pence, near its September 22 low of 71.97.
In the options market, risk reversal spreads widened in favour of euro puts, or the right to sell the euro, with one month spread hitting the highest level since July. Still, some analysts believe it is too early to say if the euro will sustainably break out of its rough $1.11-15 trading range in the past couple of months, and head to below $1.10. "When (ECB executive board member Benoit) Coeure said in May that the ECB could expand its QE, the euro fell below $1.10. But what's different now from that time is the US monetary policy outlook," said Minori Uchida, chief currency strategist at the Bank of Tokyo-Mitsubishi UFJ.
"At that time, everyone was thinking the US will raise rates soon," he added. Although US Federal Reserve policymakers have been saying rates could be raised by December, concerns over slowing global growth and a strong dollar have many investors betting that the Fed will wait at least until early next year before lift-off. That left markets focused on the Fed's policy-setting meeting on October 27-28.
As global share prices rallied on the ECB news, boosting risk sentiment, the low-yielding yen dropped to a one-month low of 120.78 to the dollar on Thursday. It last stood at 120.705. Furthermore, the ECB's dovish comments fanned speculation that the Bank of Japan could expand its stimulus when it reviews policy next Friday. But others argued that the BOJ may prefer to wait for the ECB's actions in December before making a firm decision.
Revived risk appetite also helped to lift commodity-linked currencies. The Australian dollar rose 0.4 percent to $0.7238, recovering from its two-week low of $0.7182 hit on Thursday.