Reuters: US Dollar Report: FOREX-Euro falls to 3-week low vs dollar as ECB and Fed diverge

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FOREX-Euro falls to 3-week low vs dollar as ECB and Fed diverge Apr 4th 2012, 19:20 Wed Apr 4, 2012 3:20pm EDT * ECB leaves rates unchanged; Draghi sees downside risks * Options market points to more euro downside * Dollar extends gains after Fed curbs QE speculation By Julie Haviv NEW YORK, April 4 (Reuters) - The euro slumped to its lowest level against the dollar in three weeks on Wednesday after European Central Bank President Mario Draghi said the euro zone economic outlook is subject to downside risks, leaving the door open for more policy action. The euro came under pressure as Draghi's dovish comments contrasted with minutes from the U.S. Federal Reserve's March policy meeting, released on Tuesday, that showed U.S. policymakers were less keen on adding monetary stimulus as the American economy improves. A widening interest rate differential between the euro zone and the United States would favor the dollar over the euro. The single currency was already under pressure after Spain's borrowing costs jumped at a bond auction. Losses accelerated after Draghi's comments, which came in a news conference after the ECB, as expected, announced it was holding interest rates at record lows. The euro has dropped 1.6 percent against the dollar this week, its worst three-day fall since March 2. Technical analysts highlighted the euro's break below its 100-day simple moving average at $1.3155 as a bearish sign, but technical support for the euro lies as $1.31, a level in which short covering is should emerge, strategists said. Nevertheless, EUR at $1.300 may be tested at the end of the week if the U.S. Labor Department's nonfarm payrolls report shows a payroll gain of over 200,000, said Boris Schlossberg, director of currency research at GFT Forex in Jersey City. "That would confirm the view that there will not be any QE3." The Fed's two rounds of bond buying, or quantitative easing, were negative for the dollar as they were tantamount to printing money. In the options market, three-month risk reversals in euro/dollar showed a bias for euro puts, reaching a session low of -2.28 vols on Wednesday versus -1.75 vols on Tuesday. It last traded at -1.90 vols. While euro options look biased towards the downside longer term, there was some buying of the calls for June on Wednesday, according to Matthew Schilling, a broker at RJO FUTURES in Chicago. "Traders are buying puts for the September options," he said. "I believe that currencies that are paired with the U.S. dollar are going to stay within defined ranges for the next few months until we get more confirmation on what the Fed plans to do this year." The euro last traded at $1.3142, down 0.7 percent on the day against the dollar. The session's trough of $1.3105 was its lowest since March 16. Implied volatility on three-month euro/dollar options , a gauge of expectations regarding a currency's price action, rose to a three week high of 10.45 percent. It was at 9.95 percent on Tuesday. "The market has been locked into a range because there was no dominant FX theme. Now it looks as if higher U.S. rates and concern on Spanish debt could be the short-term drivers, opening up room for higher volatility," said Steven Englander, head of G10 strategy at CitiFX, a division of Citigroup in New York. The common currency also struggled against the yen, falling more than 1 percent on the day to 107.88 yen, its lowest since March 13. It was last at 108.46, down 1 percent. AUSSIE STUMBLES The U.S. currency rallied against the Australian dollar , which dropped to a low of US$1.0238, its lowest since Jan. 13, after Australia posted a surprise trade deficit, fueling expectations its central bank would cut interest rates in May. The Australian dollar broke through support at the 50 percent retracement of the November to February rally, leaving the door open to a test of the 61.8 percent retracement of the same rally. The yen regained ground against the dollar after coming under heavy selling pressure following the Fed minutes and the spike in U.S. Treasury yields. The greenback was last down 0.4 percent on the day at 82.52 yen, retreating from a session high of 82.93 yen. Link this Share this Digg this Email Reprints

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