The euro extended its decline, hitting the lowest since early August, on bets the European Central Bank will keep lowering interest rates to support the region’s faltering economy.
The euro extended its decline, hitting the lowest since early August, on bets the European Central Bank will keep lowering interest rates to support the region’s faltering economy.
The currency dropped 0.2% to $1.0793 in New York trading, weakening throughout the session after Governing Council member Mario Centeno said the central bank would consider ramping up monetary easing should the data warrant it. ECB President Christine Lagarde later said in an interview with Bloomberg Television that while the path of rates was clear, the pace was still “to be determined.”
The euro has come under pressure as traders started to bet of a half-point rate reduction from the ECB amid concerns about the health of the European economy. The central bank has already stepped up the speed of easing by delivering back-to-back cuts as inflation receded more quickly than anticipated.
While bets for a move toward parity are not in high demand through DTCC, interbank desks have noticed hedges for that scenario on over-the-counter trades. JPMorgan also noted a pick-up in euro selling with some put options targeting $1.
Money markets price a 28% chance the ECB will cut rates by 50 basis points in December, an outcome that wasn’t even in the cards earlier this month. Swaps imply a total of 135 basis points of easing by the end of 2025 in late European trading.
Heightened demand for the US dollar in the run-up to the US election has also weighed on the euro, with traders bracing for a potential Donald Trump victory that would likely lead to a ramp up in tariffs. That could boost the dollar by fanning US inflation and increasing geopolitical tension.
“The Eurozone stands to be burned in a big way by potential tariffs coming from a Trump administration, as do many regions of the world,” said Helen Given, a foreign-exchange trader at Monex. “If preliminary polling continues to move in the former president’s favor in the next weeks, there’s a little bit of additional downside for the euro.”
Traders have been ramping up wagers against the euro through options and a drop below $1.08 was the biggest short-term bet in that market, according to data from the Depository Trust & Clearing Corporation.
“It’s headed towards $1.07 as markets price in rising odds of a Trump Presidency which is very bullish the USD and does not bode well for the trade and China sensitive euro area,” said Jayati Bharadwaj, a currency strategist at TD Securities.
Firms including J.P. Morgan Private Bank and ING Groep NV recently flagged the risk of the euro falling even further toward parity with the dollar. Goldman Sachs Group Inc. said the common currency could tumble 10% if Trump and the Republicans win.
While bets for a move toward parity are not in high demand through DTCC, interbank desks have noticed hedges for that scenario on over-the-counter trades. JPMorgan also noted a pick-up in euro selling with some put options targeting $1.
Risk reversals, a barometer of market positioning and sentiment, show bearish sentiment in the euro is highest in more than three months. Meanwhile, the cost of hedging the currency has surged, with the euro-dollar one-year volatility reaching a two-month high on Friday.
