The single currency fell sharply to a three-week low of 1.3312 against the dollar on speculation that the European Central Bank may cut interest rates more than forecast on slowing inflation. Eurozone HICP slowed to 1.6% in December, much weaker than the expectation of 1.8% and well below 2.1% in November. The ECB is widely expected to cut its key rate by at least 25 basis points next week.
ECB council member Vitor Constancio said policy makers are prepared to cut interest rates if necessary to keep inflation on target. He said that if price growth slows down too much below the central bank’s goal of 2 percent, the European monetary policy will certainly respond with interest-rate reductions.
The greenback rose to 94.65 and 1.1280 against the Japanese yen and the Swiss franc after U.S. President-elect Barack Obama was said to favor an economic stimulus package of about $775 billion. The two-year U.S. Treasury yield was 0.89 percentage point lower than the same-maturity German bond. The gap has narrowed from 1.22 at the beginning of December, making the U.S. securities more attractive.
The British pound weakened briefly to 1.4503 and then rose strongly to 1.4994 on active cross buying in sterling. The single currency tumbled from 0.9300 to 0.9023 against the sterling. The sterling rallied versus the Japanese yen from 135.48 to 140.85.
On the data front, U.S. non-manufacturing data came in better-than-expected at 40.6, the expectation was 37.0, however, the U.S. factory orders in November decreased by 4.6% versus the forecast of a drop of 2.5% after the downwardly revised 6.0 decrease in October.
Wednesday will see the release of German unemployment rate and unemployment change, eurozone PPI and U.S. ADP employment.