By Sruthi Shankar and Vidya Ranganathan
LONDON/SINGAPORE (Reuters) – The euro fell sharply against the dollar on Monday after economic data painted a gloomy picture of the euro zone economy and fueled speculation that the European Central Bank (ECB) would ease monetary policy further this year.
The common currency fell 0.6 percent to $1.1096, on track for its biggest daily loss in more than three months, moving further away from its 13-month high reached in late August on speculation that US monetary policy would ease more quickly.
A survey by S&P Global showed that business activity in the euro zone fell sharply and unexpectedly this month as the bloc’s dominant services sector stagnated while the downturn in manufacturing accelerated.
The slump appeared to be broad-based. In Germany, the decline even worsened, while France, after the upswing caused by the Olympic Games in August, fell into contraction again.
“The data definitely leaves the door open for a rate cut in October. Whether they will actually keep that door open is too early to say, but the numbers are pretty grim,” said Kenneth Broux, head of corporate research, foreign exchange and interest rates at Société Générale.
“The Fed has switched from inflation to growth, and the ECB will eventually make the same transition.”
Traders now expect the ECB to cut rates by around 42 basis points this year (compared to around 38 basis points last week), meaning they are more likely to expect the central bank to cut rates again in October.
The US dollar index, which measures the greenback against six other major currencies, rose 0.4 percent to 101.13, remaining above the one-year low it hit last week.
British PMIS not so bad
The pound fell 0.3 percent to $1.3281, but managed to break its session low after a similar survey showed that British companies reported a slowdown in growth this month, albeit less severe than in the euro zone.
Sterling hit its highest level in over two years against the dollar on Friday following the release of strong British retail sales data. The Bank of England left interest rates unchanged last Thursday, with its governor saying the central bank must be “cautious not to cut too quickly or too much”.
The dollar lost value against the yen, but only marginally, as Japan observed a holiday. Last week, the greenback hit a two-week high of 144.50 yen after the Bank of Japan (BOJ) left interest rates unchanged and indicated it was in no hurry to raise them again.
The decision, which came just days after the Fed cut interest rates by 50 basis points, halted the yen’s strong gains this month. The currency rose by about 1.5 percent in September.
For the yen, this means that the election of a new prime minister by the governing parties at the end of this week will make the BOJ’s job difficult in the coming months. New elections at the end of October are considered likely.
The Liberal Democratic Party’s leading candidates to succeed outgoing Prime Minister Fumio Kishida have expressed differing views on monetary policy.
Sanae Takaichi, who is seeking to become the country’s first female prime minister, is a reflationist who accuses the BOJ of raising interest rates too early. Shigeru Ishiba has said the central bank is “on the right policy path,” while Shinjiro Koizumi, son of charismatic former Prime Minister Junichiro Koizumi, has so far said only that he will respect the BOJ’s independence.
Bitcoin rose 0.4 percent to $63,500. At the start of the session, the price had risen 2.4 percent to a monthly high of $64,730.
Chris Weston, head of research at Pepperstone, said the “Goldilocks macro backdrop” was the key factor behind the solid upward momentum.
“Right now, this is a rally to watch. As we’ve seen over the years, when Bitcoin hits the mark, the trends can be strong and fear of missing out (FOMO) can really get crypto players excited.”
In the weekend news, Republicans in the U.S. House of Representatives introduced a three-month stopgap bill to avert a government shutdown.
(Reporting by Vidya Ranganathan in Singapore and Sruthi Shankar in London; Editing by Jamie Freed, Kim Coghill, Amanda Cooper and Mark Heinrich)
