The European Central Bank’s (ECB) December monetary policy announcement has certainly had an impact, and the kind many investors were looking for.
Their decision to extend their bond purchase program by an additional six months, along with a 10 basis point cut to its deposit rate, underwhelmed markets who had had been expecting far more aggressive policy easing from the central bank.
Yes, ECB President Mario “whatever it takes” Draghi was not so super overnight, at least in the eyes of investors.
Stocks and bonds copped a pasting, thanks to widespread disappointment that the ECB had not done more.
Along with other asset classes, the US dollar was also hit hard, thanks largely to the euro screaming higher on the back of short covering from investors.
The chart below, using data from Thomson Reuters, reveals that the US dollar index – essentially a gauge on the value of the dollar against a weighted basket of currencies including the euro, Japanese yen, UK pound and Canadian dollar – suffered one its largest declines on record on Thursday.
It fell by 2.12%, the largest percentage fall since March 2009 and the 18th largest on record since the index first came into existence in 1973.
While stocks, commodities, currencies and, on occasion, bonds, regularly suffer declines of this magnitude, the US dollar index is traditionally stable given its spread of weighting.
So, at over 2%, Thursday’s decline demonstrates just shocked the markets were at the ECB’s actions. The decline was the largest seen in over six years.
It was largely unexpected despite communications to the contrary suggesting that the ECB was about to fire yet another monetary policy bazooka.
Some food for thought before the US Federal Reserve meets in two weeks time, an event where almost everyone in the market believes interest rates will increase for the first time in nearly a decade.