Euro falls as investors eye ECB rate cuts

The euro dropped to its lowest level since mid-November on Friday after the European Central Bank signalled it could cut rates as soon as June even with a hot US economy likely forcing the Federal Reserve to wait until later in the year.

Meanwhile, the Japanese yen fell to a new 34-year low as the dollar continued to charge higher, leaving investors vigilant for signs of intervention from Tokyo officials. The euro dropped to $1.0674 in early European trading and was last down 0.47% just above that level. It was on track to have fallen 1.5% since Monday, its biggest weekly drop since mid-2023.

A hot US inflation print on Wednesday caused investors to rapidly rein in their bets on Fed rate cuts this year, moving the estimated start date from June to September.

But on Thursday the ECB signalled it was still likely to start cutting rates in the summer, given that inflation has fallen more sharply in the single-currency bloc.

“The comments that we’ve had from ECB officials are that June is still on the cards and maybe more moves after that,” said Jane Foley, head of FX strategy at lender Rabobank.

“They seem to be acknowledging that there will be a divergence from the Fed and I think that was reassurance for speculators this morning… hence the move in the euro.”

The dollar index, which tracks the currency against six peers, was last up 0.38% at 105.67, a five-month high. It has jumped 1.3% this week, the biggest five-day gain since May 2023.

The difference in interest rate expectations has pushed the gap between U.S. bond yields and German euro zone benchmark yields to the highest since 2019, making U.S. bonds more attractive and boosting the dollar.

Agencies