Euro rebounds as doubts about ECB bank stimulus package emerge

Euro rebounded on Wednesday as comments from European policymakers introduced some doubt over the scale of a European Central Bank stimulus package expected next week, while investors sold the dollar for riskier currencies.

Christine Lagarde, the ECB’s likely next president, said highly accommodative monetary policy for a prolonged period was necessary but she added that the bank needed to be mindful of the negative side-effects of such tools.

Expectations for an interest cut, the relaunch of asset purchases and other ECB measures to stimulate the economy have weighed on the euro, on Tuesday it hit a 28-month low of $1.0926.

“The biggest risk facing the euro is the ECB not living up to expectations,” said Neil Mellor, currency strategist at BNY Mellon. “The comments from Lagarde contributed to the euro’s pull back up.”

The single currency gained as much as 0.5 percent to $1.1024.

Dollar broad-based weakness was also a factor. The greenback began its descent after data on Tuesday showed that manufacturing activity had contracted for the first time in three years last month.

That knocked the dollar back from more than two-year highs and encouraged investors to bet on more Federal Reserve interest rate cuts before the end of 2019.

The dollar was last down 0.4 percent against a basket of major currencies, its index at 98.630.

“Yesterday’s manufacturing survey was very gloomy and confirms that the U.S. is suffering from the global trade and manufacturing downturn, along with everyone else,” said Kit Juckes, currency strategist at Societe Generale.

Other safe haven currencies, such as the yen and Swiss franc, also fell as some calm returned to markets, helped by reports that Hong Kong leader Carrie Lam would on Wednesday announce the formal withdrawal of an extradition bill that triggered months of unrest.

Data showing growth in China’s service sector also boosted investor sentiment.

The yen was down 0.2 percent at 106.19 yen per dollar. The Swiss franc dropped 0.2 percent versus the euro to 1.0850 francs .

The dollar’s weakness helped China’s offshore yuan pull away further from record lows plumbed earlier this week. The yuan was last up 0.4 percent at 7.1525 yuan per dollar.

Emerging market currencies were mostly up on the dollar weakness, while the Australian and New Zealand dollars also seized on the greenback’s weakness to rise .

The British pound recovered Tuesday’s losses, when it hit a three-year low, after the latest parliamentary attempt to stop a no-deal Brexit took a step forwards.

Sterling bounced 0.9 percent to $1.2195, and against the euro it rallied 0.5 percent to 90.365 pence.

Lawmakers who defeated Prime Minister Boris Johnson’s government late on Tuesday are expected to introduce a bill in parliament seeking to stop Britain from leaving the European Union on October 31 without transitional arrangements.

Source: Reuters