The euro fell to a near one-year low against the dollar and euro zone stocks and bonds rallied on Monday as investors positioned for rising chances of further policy easing by the European Central Bank.
ECB President Mario Draghi said late on Friday that the bank was prepared to respond with all its available tools should inflation in the euro zone drop further.
Investors speculated this meant the ECB was more likely to embark on an asset purchase program, or quantitative easing, or adopt other stimulus measures in coming months which would weigh on the euro and boost assets such as stocks and bonds.
“The key message is that Draghi stands ready for more action if needed,” Franz Wenzel, chief strategist at AXA Investment Managers in Paris, said.
“Whether they’re going to do quantitative easing remains to be seen but we’re fairly confident that the financial engineers at the ECB will find other tools. At this juncture, we don’t exclude quantitative easing at the end of this year.”
A weak German business sentiment index, Ifo, also added pressure on the euro in European trade, as it reinforced concerns about Germany, the euro zone’s biggest economy.
The euro skidded to $1.3185 EUR= in early Asian trade, its lowest since September 2013, from around $1.3246 late in New York on Friday. It was last trading at $1.3190, down about 0.3 percent on the day, amid lower than usual volumes due to a holiday in London.
The euro zone’s blue-chip Euro STOXX 50 index .STOXX50E was up 1.2 percent to 3,135.38 points after climbing to a three-week high in early deals. Both Germany’s DAX.GDAXI and France’s CAC 40 .FCHI gained 1.2 percent.
The MSCI All-Country World index .MIWD00000PUS was up 0.1 percent at 429.03 points.
Spanish ES10YT=TWEB and Italian IT10YT=TWEB 10-year yields fell 8 bps to 2.31 percent and 2.51 percent, respectively, while Portuguese yields PT10YT=TWEB fell 14 bps to 3.12 percent.
“The … market has interpreted Draghi’s statement as meaning that broad-based asset purchases, or quantitative easing, has now become more likely,” said Lutz Karpowitz, currency strategist at Commerzbank.
The Ifo business climate index dropped for a fourth straight month in August and the Ifo Institute said it was likely to cut its 2014 growth forecast for Germany to 1.5 percent from 2 percent.
Also sounding dovish was Bank of Japan Governor Haruhiko Kuroda who vowed over the weekend to press ahead with aggressive monetary easing for as long as needed to convince the public that deflation was dead and buried.