The euro continued to decline against the dollar on Friday, despite news of disappointing US payroll growth in March.
By Peter Martin
Friday, April 4, 2014
The weakening of the euro over the last twenty four hours can be laid at the feet of European Central Bank President (ECB) Mario Draghi, whose strong remarks on Thursday, in which he made it clear that the possibility of quantitative easing (QE) was back in the Eurozone frame again, had a sharp effect on the value of the shared currency.
The euro had been on a fairly bullish run from the end of January through to the middle of last month, which is likely to have concerned the governing council of the ECB, as a stronger euro would hinder exports and consequently threaten a still-fragile recovery.
The ECB’s decision to make no interest rate change on Thursday, keeping its benchmark refi rate at 0.25%, came as little surprise and provoked no major movement in the EUR/USD exchange rate, but Mr Draghi’s press conference that followed was unexpectedly aggressive when it came to discussing the commitment of the central bank to combat low inflation.
“We will consider all instruments available to us. We are resolute in our determination to maintain a high degree of monetary accommodation and act swiftly if required,” Mr Draghi said, and re-iterated once again that the EBC’s accommodative monetary policy would continue for ‘an extended period of time’ because of the subdued inflation outlook.
Mr Draghi made it clear that if low inflation persists too long, the central bank would use QE, saying, ‘The governing council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too-prolonged period of low inflation,’ and later adding in the subsequent question-and-answer session that the governing council had discussed QE during its meeting.
The euro has fallen below 1.37 against the dollar, shedding another 0.2% by late morning in New York on Friday, despite the dollar broadly declining after the disappointing employment report from the Bureau of Labor Statistics (the dollar index, a gauge of the US dollar’s strength against a basket of six major currencies slipped 0.05% in morning trading on Friday).
Non-farm payrolls increased by 192,000 last month, showing that the US labor market is still improving, but this pace failed to match market expectations; a Reuters survey of economists had given a consensus estimate of 200,000, while the unemployment rate was predicted to improve to 6.6%. Instead unemployment held steady at 6.7%. Given Fed Chairman Janet Yellen’s comments earlier this week, in which she said she thought there remained slack in the labor market and that the Fed’s support ‘is still needed and will be for some time’, it is likely that Friday’s report will be seen as not being satisfactorily strong enough, despite a healthy upward revision to February’s payroll growth.
The US labor data is in contrast to a Canadian employment report released at the same time. Statistics Canada revealed a surprisingly large jump in employment growth for last month, following a decline seen in February. Canadian employment increase 42,000 in March, far exceeding the 22,500 that had been forecast by a Bloomberg poll and the biggest increase seen in seven months. The Canadian unemployment rate improved to 6.9% from 7.0%. Bank of Canada Governor Stephen Poloz said last month that a rate cut might be required if the economy continued to show signs of weakness, but this latest result now makes such an outcome look less likely, helping the Canadian dollar to push to a four-week high on Friday against its US counterpart. By late morning in New York, USD/CAD was down 0.52% at 1.0977. The Bank of Canada meets on April 16 in order to make a decision on monetary policy.
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