The euro on Thursday logged its largest one-day percentage drop since the U.K.’s vote to exit from the European Union in late June. The slump follows the European Central Bank’s decision to trim its massive monthly bond-buying program beginning in April.
In the minutes after the announcement, the shared currency (XTUP:EURUSD) rose 0.7% to $1.0874, its highest level since Nov. 14. But it soon turned lower, falling more than 1.5% to a three-day low of $1.0602, as investors realized that the statement contained a mixed message of continued stimulus but at a lower level, which was viewed as both dovish and hawkish. The euro traded at $1.0616 late Thursday in New York.
“The euro/dollar was exposed to extreme levels of volatility during trading on Thursday following the European Central Bank’s market shaking decision to taper its monetary stimulus,” said Lukman Otunuga, a research analyst at FXTM, in a note.
“The euro first rallied on the headline that the ECB would be reducing its purchases. The euro then fell on the headline that the ECB would be extending the purchases’ time horizon,” said Doug Borthwick, managing director at Chapdelaine FX, a subsidiary of Tullett Prebon.
The ECB’s decision surprised many market strategists and investors who had expected the central bank to extend its program of buying public and private eurozone debt at its present pace of €80 billion ($80.6 billion) for most of 2017. Instead, the central bank announced it would taper the program to €60 billion ($64 billion) beginning in April. The central bank also left interest rates unchanged as expected.
During a news conference, President Mario Draghi of the ECB said the central bank would be comfortable buying bonds with yields below the central bank’s deposit rate, which stands at minus 0.4%. The ECB also announced that Eurosystem central banks will also be able to accept cash as collateral for their lending facilities.
Draghi also said the governing council had not discussed scaling back its bond-buying program, and that the decision to reduce its program didn’t amount to tapering. He assured investors that the central bank would be involved in the markets “for a long time.”
Looking ahead, the Federal Reserve is widely expected to raise interest rates at the close of its two-day policy meeting on Wednesday. Fed-funds futures, used by investors to speculate on the direction and pace of rising interest rates, were pricing in a more than 97% probability of a hike next week.
John Higgins, chief markets economist at Capital Economics, noted that monetary policy in the eurozone is likely to largely remain loose despite the ECB announcement. This divergence from the U.S. where the Fed is poised to tighten its policy is expected to lead to a further weakness in the euro with the currency trading at parity against the U.S. dollar by the end of 2017.
In other currency trading, the dollar strengthened against a basket of its main rivals, with the ICE U.S. Dollar index (IFUS:DXY) rising 0.8% to 101.08. The euro is the most heavily weighted constituent of the ICE index.
The greenback (XTUP:USDJPY) rose to ¥114.03 against the Japanese yen, compared with ¥113.65 late Wednesday.
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-- Sara Sjolin contributed to this article.