WORLD FOREX: Euro Slumps On Uncertainty About ECB Policy

By Don Curren

OF DOW JONES NEWSWIRES


TORONTO (Dow Jones)--The euro ended markedly lower Friday, dropping to its lowest levels in almost a month, as it contended with uncertainty about policy direction at the European Central Bank.

Uncertainty over whether the European Central Bank will introduce new non-standard easing measures, and to what degree, has been key to the common currency's losses.

The euro dropped to a low of $1.3017 during the session, its lowest level since March 18, the day the U.S. Federal Reserve announced it was expanding its own approach to quantitative easing.

Remarks from ECB President Jean-Claude Trichet that seemed to brush aside concerns the euro is weak also weighed on the common currency, as have capital flows out of the euro zone, analysts said.

Trichet said at a seminar in Tokyo that the view of the euro being weak "doesn't really seem to reflect the present situation." He also said he is "very appreciative" of U.S. policy makers sticking to their strong dollar policy.

Currency strategists at Barclays Capital in New York cited Trichet's comments as a key driver of the euro weakness, along with the expectation the ECB will embark on some form of quantitative easing.

The range of public disagreement within the ECB is yet another negative for the euro, Barclays said.

"The euro is likely to trade with an increasingly nervous tone heading into the policy meeting in May, in our view, but should firm if the ECB delivers a limited, credit-oriented slate of quantitative measures," said analysts at Credit Suisse.

Trichet said it is "important not to create or encourage expectations" for the May 7 meeting. He also appeared to address conflicting remarks by different ECB members, which have confounded markets on the central bank's next move.

"Any ambiguity in our medium-term policy direction would delay the return of sustainable prosperity, because they would undermine confidence, which is the most precious ingredient in the present circumstances," he said.

Friday afternoon, the euro was at $1.3025 from $1.3175 late Thursday. The dollar was at Y99.30 from Y99.33, according to EBS. The euro was at Y129.32 from Y130.94. The U.K. pound was at $1.4787 from $1.4936. The dollar was at CHF1.1670 from CHF1.1472.

The dollar rose as high as CHF1.1690, its highest level since March 18 against the Swiss franc, after Swiss National Bank President Jean-Pierre Roth said the central bank will continue to pursue alternative monetary policy measures as long as there is a danger of deflation and will intervene vigorously in foreign exchange markets if need be.

The dollar dipped below Y99.0 to a low at Y98.71. The euro declined to Y128.84, more than a two-week low, as anxiety in the markets benefited the yen, typically a major recipient of safe-haven flows.

Shaun Osborne, chief currency strategist at TD Securities in Toronto, said the formerly close correlation between U.S. equity market strength and weakness in the U.S. dollar seems to have waned in recent sessions.

The euro's weakness Friday came despite gains in U.S. stocks.

The euro has been significantly pressured by bond redemption and coupon payments in euro-zone countries in recent trading, Osborne said. "A lot of that appears to have
gone back to Japan and elsewhere," he said.

Looking ahead, the single currency is unlikely to weaken too sharply, Osborne said. "We still see pretty good interest to buy on dips from Asia, and I have a hard time believing the dollar is going to do significantly better in this environment of big budget deficits," he said.