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The euro slumped to the lowest in four and a half-year against the dollar after the European Central Bank signaled it will embark on large-scale government-bond purchases as the Federal Reserve moves closer to raising interest rates.
The 19-nation common currency slid for a third week after ECB President Mario Draghi said he can't rule out deflation in the euro area. The yen also declined for a third week. The rouble plummeted 9.4 per cent to lead emerging-market peers lower. The dollar advanced gained against all of its 16 major peers before a report next week that may show the jobless rate fell to a six and a half-year low.
"The US labor market is performing well and the unemployment rate is falling further," Ralf Umlauf, head of research for Helaba Landesbank Hessen-Thueringen in Frankfurt, said by phone on Friday. "In the euro zone, it's a completely different picture. We have still very high unemployment rates near the historical top. So that's the reason why we have the divergence in monetary policies."
The euro dropped 1.5 per cent last week to $1.2002 on Friday in New York after falling to $1.2001, the lowest since June 2010. The shared currency lost 1.3 per cent against the yen to 144.63. Japan's currency traded at 120.28 per dollar.
The Bloomberg Dollar Spot Index, which tracks the dollar against 10 major peers, rose 0.9 per cent in the week to 1,141.02. It increased 11 per cent last year, the biggest gain in data going back to 2005.
Looking ahead
The dollar gained against all of its 31 major counterparts in 2014 for the first time in data going back to 1989, buoyed by an improving economy. Strategists don't see a repeat of that dominance in 2015.
More than half of those counterparts are forecast to gain next year against the greenback, led by this year's biggest loser, Russia's ruble. It is predicted to add 17 per cent after plunging 46 per cent in 2014 under the pressure of sliding oil prices and US and European economic sanctions against Russia for its role in Ukraine turmoil.
Mexico's peso is projected to gain 9.9 per cent after a losing 12 per cent last year, and the Norwegian krone may add 4.6 percent after a 19 per cent tumble.
Argentina's peso is forecast to be the biggest loser in 2015, dropping another 29 per cent after last year's 23 per cent descent.
The euro is projected to fall 1.7 per cent and the yen 3.6 per cent after each dropped 12 per cent in 2015.
Lower euro
The shared currency slumped 2.8 per cent in December for a sixth straight month of losses, its longest skid since 2010.
"Those who are subtly encouraging the lower euro, they won't be satisfied yet," Richard Franulovich, the chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York, said by phone yesterday. The extent of euro weakness "really does come down to the composition and size of this sovereign QE that they're talking about," he said.
Draghi seldom gives interviews and his comments to the German newspaper Handelsblatt reflect a drive to win over that nation. Policy makers there have led criticism of quantitative easing, saying it threatens financial stability, reduces the incentive for governments to restructure their economies, and is legally tricky.
"The risk cannot be entirely excluded, but it is limited," Draghi said when asked if the region could enter a spiral of declining prices, falling wages and postponed spending. "We have to act against such risk."
Japan easing
Policy makers in Japan have also embraced monetary stimulus to ward off deflation, prompting the yen to fall for a third consecutive year against dollar in 2014.
The foreign-exchange market is bracing for more yen- debasing stimulus measures from the Bank of Japan after the nation slipped into a recession last quarter. The BOJ can employ new measures to reach its 2 per cent inflation goal in the 2015 year, Governor Haruhiko Kuroda said in an interview with the Mainichi newspaper.
The Fed said it will be patient on the timing of the first interest-rate increase since 2006 and raised its assessment of the labor market at the last meeting of its Open Market Committee on December 17. The FOMC's next scheduled decisions are January 28, March 18 and April 29.
Fed funds futures show a 63 per cent probability that the central bank will raise rates by September, up from a 45 per cent likelihood at the end of November.
Analysts at BNP Paribas SA recommended buying the dollar and selling the euro and yen in a note on Friday.
"With US economic outperformance keeping US yields and the dollar supported, investors' question at the start of the year should not be whether to buy the dollar, but which currency to sell against it," the bank said.
