June 15, 2018 / 4:18 AM / 4 days ago

Forex: Euro on track for worst week in 19 months on ECB's cautious stance

TOKYO (Reuters) - The euro on Friday was headed for its worst weekly loss in 19 months after a cautious European Central Bank signalled it will keep interest rates at record lows well into next year.

FILE PHOTO: The German Central Bank (Bundesbank) presents the new 50 euro banknote at its headquarters in Frankfurt, Germany, March 16, 2017. REUTERS/Kai Pfaffenbach/File Photo

Following a closely-watched meeting on Thursday, the ECB said it will end its massive bond purchase scheme by the end of this year, taking its biggest step towards dismantling crisis-era stimulus.

The euro briefly spiked to a one-month high of $1.1853 following the announcement.

But euro bulls were soon in retreat as the ECB also indicated that it would keep interest rates steady at least through the summer of 2019, reflecting the uncertainties hanging over the euro zone economy.

Euro bulls had been emboldened earlier this month as expectations grew for the ECB to begin raising rates at an earlier juncture in 2019, after comments by policymakers such as ECB chief economist Peter Praet, who struck a hawkish tone despite recent political troubles in Italy.

The single currency slumped nearly 1.9 percent on Thursday, its largest one-day fall since Britain’s June 2016 Brexit vote shock.

It stretched overnight losses to brush $1.1555, lowest since May 30. The currency was down 1.72 percent on the week, positioning it to have its biggest weekly loss since November 2016.

“The euro showed such a big reaction to the ECB meeting as its stance came in sharp contrast to the Federal Reserve, which had struck a hawkish tone just the day before,” said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo.

The Fed on Wednesday raised interest rates for the second time this year and indicated that it could tighten policy two more times in 2018.

“Instead of reacting immediately to the Fed, many in the market had opted to first see out the ECB meeting, considered the main event of the week. And they duly reacted,” Ishikawa said.

The euro was a shade higher at 128.035 yen after dropping 1.7 percent overnight.

The dollar edged up 0.1 percent to 110.720 yen after rising 0.25 percent the previous day.

The greenback was up roughly 1 percent versus its Japanese peer on the week, during which it brushed a three-week peak of 110.850 after the Fed’s Wednesday policy announcement.

The currency pair, sensitive to shifts in risk appetite in the broader markets, could be impacted by developments later on Friday in the U.S.-China trade spat.

U.S. President Donald Trump is due to unveil revisions to his initial tariff list targeting $50 billion of Chinese goods, and focus was on whether the revisions would ease or further fuel trade tensions.

“The tariff revision is a risk event the market is bracing for, with the United States potentially getting even more active on trade issues ahead of Mexico’s elections in July,” said Shusuke Yamada, currency and equity strategist at Bank of America Merrill Lynch in Tokyo.

Mexico holds a presidential election on July 1 at a time when relations with its northern neighbour are frosty.

“The bottom line for currencies, however, is that the Fed is hawkish and the ECB is not, and monetary policy diversion remains the primary driver,” Yamada said.

The yen’s reaction to the Bank of Japan’s decision to stand pat on monetary policy on Friday was limited, as such an outcome had been well anticipated.

The BOJ offered a weaker view on inflation than in April, signalling that it will be in no rush to dial back its massive stimulus programme.

Against a broadly stronger dollar, the Australian dollar was down 0.25 percent at $0.7458 after slipping to a one-month trough of $0.7454 .

The dollar index gained about 0.2 percent to a two-week high of 94.995 , after rallying more than 1 percent on Thursday.

Editing by Kim Coghill and Richard Borsuk

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