The euro slumped to a fresh one-year low against a broadly strong dollar on Tuesday on persistent speculation that the European Central Bank will introduce more aggressive monetary easing.
The dollar reached its highest since July 2013 against a basket of major currencies and traded at 105 yen for the first time in eight months.
The ECB will hold a policy meeting on Thursday and its post-meeting news conference will be closely watched for any signs that President Mario Draghi is moving towards full-scale quantitative easing – effectively the printing of money – to boost the flailing euro zone economy.
Since Draghi said he would use “all the available instruments” to ward off the threat of deflation at a U.S. Federal Reserve conference in Jackson Hole last month, speculation that the ECB will introduce QE has ramped up.
Weak data added fuel to market chatter on Monday: euro zone factories barely increased prices last month, while French manufacturing activity fell at the fastest pace in 15 months. A separate report confirmed the German economy contracted in the second quarter.
That all helped to send the euro to a trough of $1.3110 on trading platform EBS on Tuesday, its lowest since September 2013.
But that move was modest compared with the dollar’s gains across other currencies, including a 0.7 percent gain against the yen and a 0.5 percent rise against sterling.
“This (the euro’s trough) is not just about the ECB. Part of this is a dollar story – the dollar has outperformed a whole bunch (of developed world currencies),” said Jane Foley, a senior currency strategist at Rabobank in London.
Foley added that increased momentum around the idea that the ECB would loosen policy, and that the Bank of Japan would introduce another round of QE, was driving the dollar’s gains, with a perception that it was “the best of the bunch”.