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Euro falls, speculation of deposit-rate cut boosted

London - The euro approached a six-month low against the dollar after European Central Bank (ECB) President Mario Draghi said economic risks to the region were “clearly visible,” stoking speculation he’s preparing to bolster currency weakening stimulus measures.

The shared currency slid against 12 of its 16 major peers after Draghi told European lawmakers that the ECB’s quantitative-easing program will be extended if needed to reach its inflation goal.

The currency has tumbled 5% since the October 22 policy meeting, when officials discussed reducing the central bank’s deposit rate.

“There was a slight risk that President Draghi, having seen the euro weaken a lot since the last meeting, might back off the need to lower the deposit rate,” said Chris Turner, London-based head of currency strategy at ING Groep NV.

However, with his latest comments, “he’s given the market some confidence that the ECB is probably going to cut the deposit rate and probably will increase the size of QE,” Turner said.

“There’s a chance in December that we break below $1.05.”

The euro fell 0.2% to $1.0725 at 13:26. It touched $1.0675 on November 10, the lowest since April. The 19-nation currency was little changed at ¥131.86, while Japan’s currency was at ¥122.96 to the dollar.

’03 low

The start of the ECB’s €1.1trn bond-buying program in March pushed the euro to the weakest level since 2003, assisting policy makers’ efforts to boost inflation and make the region’s exports more competitive.

Yet with consumer- price growth at zero last month, and the euro struggling to retest its lows, speculation is growing that further action is needed.

The biggest impact may lie in cutting the deposit rate. The ECB lowered the rate to below zero last year, and it’s now minus 0.2%.

“With the large impact of the ECB’s initial shift to QE showing signs of fading - and mounting concerns about constraints on the supply of eligible assets for purchase - we see little impact on the euro from the ECB’s extension of purchases,” Marvin Barth, head of European foreign-exchange strategy at Barclays in London, wrote in a report.

“But we expect a large effect on the euro from a further cut to the deposit rate.”

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