Traders staking their reputations and capital on a weaker euro are looking to U.S. policy makers to deliver where the European Central Bank failed.
With ECB President Mario Draghi warning this week that interest rates may have reached a floor — after lowering them as part of an expansive program of additional easing — one possible catalyst of a lower common currency has been shuttered. That’s drawing attention to the Federal Reserve’s March 15-16 meeting, and whether its actions can support a stronger dollar at the expense of the euro. The Bank of Japan will issue a policy statement March 15.
“At this point, the Fed’s probably going to have to do their job for them,” said Jennifer Vail, head of fixed-income research in Portland, Oregon, at U.S. Bank Wealth Management, which oversees $125 billion. “The euro’s probably going to be stuck in a range. Where it has the potential to break out of that range and start moving lower, really sits on the shoulders of what the BOJ and the Fed do.” Vail is bearish on the euro versus the dollar as she sees the Fed being less accommodative than markets anticipate.
Euro resilience has upended the forecasts of banks including Goldman Sachs Group Inc., which is sticking to bets the euro will fall to 95 U.S. cents within 12 months. The currency has gained 2.7 percent this year and remains stronger than the $1.05 median estimate made Dec. 31 for where the euro would trade by the end of March.
The euro rose 1.4 percent this week to $1.1156. The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 peers, fell for a second week, slumping 1 percent.
Trading in currency futures and options rose to a record on March 10, when the ECB met, thanks to interest in euro contracts, CME Group said in a statement on Friday. Total trading climbed to 2.5 million contracts, surpassing a previous high of 2.4 million that had held since May 2010. Euro futures accounted for more than $127 billion of trades, the exchange said.
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Options prices show traders are paying the lowest premium since Feb. 10 to protect against a euro slump. Hedge funds and other large speculators are also starting to capitulate, shaving bets against the currency to the least since June 2014 late last month.
The prospect of tighter monetary policy in the U.S. holds out a kernel of hope for euro bears. Futures contracts show a 51 percent likelihood of a rate increase by June, from 2 percent probability a month ago. Policy makers have also indicated they see nascent signs of inflation, backing the case for rate increases.
“There’s still room for euro-dollar to go down, but a lot of it now turns into a dollar story,” said Jeremy Cook, the London-based head of currency strategy at World First UK Ltd., an international payments company that had about $9 billion of foreign-exchange turnover in 2015. “You’ve got to be coming from a position where you think that the Fed hikes another three times this year; it’s not going to come from the ECB.”
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