Another warning shot from the European Central Bank that stronger stimulus may be right around the corner worked in the US dollar’s favour and weighed on the euro. In no uncertain terms, Mario Draghi, head of the ECB, said the central bank ‘will not hesitate’ to use stronger stimulus to help prevent low inflation from unravelling the bloc’s anemic recovery. The lower interest rate rhetoric in Europe undercut two days of gains for the euro. The dollar, meanwhile, has seen its latest winning streak show signs of levelling off, a reflection of how markets have largely come to terms with US borrowing rates rising as soon as next month. The baked in expectations for the Federal Reserve suggests more of an uneven performance over the short run for the dollar but ongoing outperformance over the long haul.
Euro
After spending the last two days rebounding above seven-month lows against the dollar, the euro slipped anew after the ECB’s Draghi let more doves loose. The chief of the 19-nation central bank hinted at stronger stimulus, possibly in the form of lower interest rates and/or bigger and longer lasting monthly bond purchases aimed at getting banks to step up lending, and spurring businesses and consumers to increase borrowing and spending to boost growth and inflation. The ECB’s seemingly tacit approval of a weak currency leaves the euro prone to selling on rallies.
Sterling
Sterling fared mixed as central bank policy divergence buoyed it against the euro, but weighed on it against the dollar. Gains of late have proven tough to sustain for the pound on the view the Fed could have a few rate hikes under its belt before its British counterpart starts tightening policy. But widespread expectations for Britain to boost borrowing costs before the ECB kept sterling within reach of three-month peaks against the euro.
US dollar
The dollar has seen its gains diminish on the view the Federal Reserve next month would boost its key rate for the first time in nine years. The Fed is expected to soon embark on a rate hiking campaign but the perceived slow and gradual fashion can lower the dollar’s speed limit. Many expected the dollar to continue its streak of dominance until other central banks start to follow in the Fed’s tightening footsteps.