Euro Declines as German Production Falls Most Since 2009

The euro weakened as German industrial production fell the most since 2009, underscoring the risk of a slowdown in the region’s largest economy that may put pressure on the European Central Bank to expand stimulus.

The shared currency dropped the most in almost three weeks versus the pound on signs the U.K. economy is faring better than that of the 18-nation currency bloc. The yen strengthened against most of its 16 major peers on speculation officials are growing uncomfortable with the pace of its depreciation. Australia’s dollar rose after a central bank meeting.

“That was a very weak data point” from Germany, said John Hardy, the head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark. “I’ve been taken aback by the speed and the scale of the euro move. The monetary policy divergence story has more fuel in it and I think it could trade down toward $1.20. We could get there relatively quickly, within a few weeks.”

The euro dropped 0.5 percent to $1.2594 at 7:41 a.m. New York time. It slumped 0.7 percent to 136.74 yen. The Japanese currency advanced 0.2 percent to 108.58 per dollar after gaining 0.9 percent yesterday. It reached 110.09 per dollar on Oct. 1, the weakest level in six years.
Output Slump

The 18-member euro slumped toward a more-than-two-year low against the dollar today after industrial production in Germany dropped 4 percent in August from the previous month, when it increased a revised 1.6 percent. A report yesterday showed German factory orders also plunged the most since 2009.

Royal Bank of Canada revised its forecasts for the euro lower, predicting it will end the year at $1.23, from a previous estimate of $1.30. The common currency will drop to $1.17 by the end of 2015, from an earlier forecast of $1.25, strategists led by Adam Cole, the head of global foreign-exchange strategy in London, wrote in an e-mailed report dated yesterday.

The pound climbed versus the euro as a report showed U.K. manufacturing expanded for a third month in August. Production rose 0.1 percent from July, when it increased 0.3 percent.

Sterling advanced 0.4 percent to 78.40 pence per euro, the biggest gain since Sept. 17. It slipped 0.1 percent to $1.6064.

Japan’s currency rose for the first time in three days against the euro as Bank of Japan Governor Haruhiko Kuroda said the central bank will closely monitor the exchange rate and Prime Minister Shinzo Abe said its weakness is hurting small companies and households.
Yen Burden

Abe’s comments, which were made to parliament in Tokyo, follow an Oct. 3 pledge to aid small and medium-sized enterprises hurt by cost increases through an initiative pressing large businesses to assist small firms to pass on rising raw material and energy costs.

“Official comments have voiced some sympathy towards importers and smaller companies having to pay a higher price for overseas materials and energy,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “This is causing investors to liquidate short yen positions.” A short position is a bet an asset’s price will decline.

The yen climbed 1.3 percent in the past week, the best performer among 10 developed-nation currencies tracked by ForexSQ Correlation-Weighted Indexes, as investors bet officials were seeking to talk down the pace of recent declines. The euro and the dollar were little changed.
BOJ Decision

The BOJ, which buys about 7 trillion yen ($64.4 billion) of government bonds a month, kept its asset-purchase stimulus program unchanged after a meeting today. The decision was predicted by all 33 economists surveyed by ForexSQ News between Sept. 26 and Oct. 2. Four of them expect the central bank to announce additional stimulus on Oct. 31.

Australia’s dollar appreciated a second day versus the greenback as the Reserve Bank pointed to an improvement in private demand after keeping policy settings steady. The RBA left the benchmark interest rate at a record-low 2.5 percent today, where it’s been since August 2013, and reiterated in a statement it sees a likely period of interest-rate stability. It said the exchange rate remains high by historical standards.

“The RBA was more positive on the local economy,” Kieran Davies, chief economist at Barclays Plc in Sydney, wrote in a client note.

Australia’s currency advanced 0.3 percent to 87.91 U.S cents. It rallied 1 percent yesterday, the most since March 6, rising from a more than four-year low set last week.