(June 23): The euro fell to its lowest level since June of last year after weak economic data and dovish comments from European Central Bank president Christine Lagarde prompted traders to pare back their bets on interest-rate hikes.
The common currency traded 0.4% lower at US$1.1386 as of 9.16am in New York, after data indicated German private sector and French business activity shrank in June. Options markets showed investors are the most bearish on the euro in more than three months.
“If the euro closes below US$1.14 today, then there is room for a deeper correction,” said Andrew Hazlett, a foreign-exchange trader at Monex Inc.
The economic numbers came after Lagarde said on Monday she sees no need for a more forceful response by the ECB to the Iran war. Her remarks contrasted with Federal Reserve chair Kevin Warsh signalling a tougher stance on inflation last week, which boosted the dollar.
Lagarde’s “rare dovish-leaning” comments were significant because the ECB has “mostly tried to endorse the market’s hawkish bets in the past three months", said ING Groep NV currency strategist Francesco Pesole.
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Trading data from the Depository Trust & Clearing Corporation show euro-dollar options activity surged last week to the highest in three months, with roughly 60% of interest tied to bets on a stronger dollar.
Earlier this month, the ECB raised interest rates by a quarter point, though that provided only modest euro support as the move had been expected.
Traders now see the Fed raising rates nearly two times through March. Chicago Fed president Austan Goolsbee said he remains concerned about inflation and questioned whether all the factors driving prices up are temporary.
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