LONDON (Reuters) - The euro sunk to a two-month low against the dollar on Thursday after the European Central Bank said interest rates would stay “at their present or lower levels” and opened the door for more quantitative easing.
The common currency initially rose, as the ECB kept its key benchmark rate unchanged at minus 0.40%.
But then it reversed the gains and to drop to the two-month low of $1.1109, down 0.3% on the day and near a two-year low it reached in May.
Investors have interpreted the ECB’s message to mean a rate cut is coming in September, along with other stimulus measures, as the central bank seeks to lift low inflation and boost economic growth.
The euro has fallen for five consecutive days, and has shed 2.2% against the dollar so far this month.
ECB President Mario Draghi gives a press conference at 1230 GMT.
Earlier in the day, the euro was trading lower after a bleak German Ifo business sentiment survey for July.
Hedge funds kept short positions on the euro at $4.39 billion in the week to July 16, around levels seen early this year, according to the Commodity Futures Trading Commission.
A Deutsche Bank index showed investors have been ramping up call options holdings in euro/dollar, pushing the amount of call options to the highest since early 2018, which serves as evidence that some market participants see the euro gaining.
The Swiss franc, buoyed by expectations of lower rates in the euro zone, rocketed to a two-year high of 1.0963 against the common currency and was last at 1.0982. The franc gains bolstered expectations the Swiss would intervene to weaken the currency and protect their export-reliant economy.
Sebastien Galy, macro strategist at Nordea Asset Management, said he expected the Swiss National Bank and Danish central banks to cut rates in September and he saw “a decent chance that the SNB already reacts post today’s ECB meeting.”
Elsewhere, expectations of lower interest rates sent the Australian dollar to a new two-week low of $0.6963.
The pound remained below $1.25 and not far from the 27-month low it reached last week, last trading slightly lower at $1.2472 as new Prime Minister Boris Johnson assembled his largely Brexiteer cabinet.
Reporting by Olga Cotaga; editing by Susan Fenton,Larry King