Euro Pressured as Markets Digest Cuts

Markets were disappointed with the outcome of Thursday’s European Central Bank policy meeting and Mario Draghi’s comments afterward and as a result sent the Euro hurtling toward its sharpest drop in a month against the U.S. Dollar. As one analyst in New York put it the ECB head failed to alleviate any investor worries regarding progress in the resolution of the Eurozone’s protracted financial crisis. The ECB decision to hold rates at 0.75% was widely expected, and Draghi mentioned that the committee had discussed the possibility of establishing a negative rate for deposits as a way to compel banks to lend to each other rather than to park money with the ECB.

The ECB policymakers also announced that they were lowering their growth expectations for the Eurozone for next year, and said that growth risks remained. They are calling for GDP growth of only 0.3% for 2013. For market players that was enough commentary to give rise to speculation that the coming months would bring a rate cut which would further weaken the common currency.

Also putting pressure on the Euro was the escalation of political tension in Italy which sent the yields on sovereign bonds there higher. The former Prime Minister, Silvio Berlusconi, said that he was withdrawing his earlier support for Mario Monti, the current Prime Minister, which could result in a power play that might draw an early election.

The Euro had fallen as low as $1.2948 at one point before bouncing back to $1.2966; more recently the pair was trading at $1.2968. The EUR/JPY pair was recently trading at 106.96, but had earlier struck a session low of 106.80 Yen, a loss of 0.9%.