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Euro Drops as Volatility Falls to Lowest in 15 Months; Kiwi Gain

March 11 (Bloomberg) -- The euro fell, snapping a three-day rally, as a gauge of expected currency volatility declined to the lowest in almost 15 months amid the standoff between Ukraine and Russia over the Crimea region.

The gauge of price swings dropped for a second day as Ukraine’s prime minister prepared to meet U.S. President Barack Obama and western nations threatened repercussions if Russia failed to defuse tensions. The euro fell after European Central Bank Vice President Vitor Constancio said the market hadn’t fully understood the central bank’s communication. New Zealand’s dollar strengthened as economists predicted the central bank will raise interest rates at a policy meeting this week.

“Developments in Ukraine and Russia haven’t really impacted the Group of 10 currencies so much,” said Bilal Hafeez, global head of foreign-exchange strategy at Deutsche Bank AG in London. “Overall foreign-exchange activity is quite low and the major currencies aren’t really going anywhere.”

Deutsche Bank AG’s Currency Volatility Index, based on three-month implied volatility on nine major currency pairs, fell 15 basis points, or 0.15 percentage point, to 7.12 percent at 7:47 a.m. in New York, the lowest since December 2012.

The euro fell 0.2 percent to $1.3852 after rising to $1.3915 on March 7, the highest level since October 2011. The shared currency weakened 0.1 percent to 143.11 yen. The yen was little changed at 103.28 per dollar.

Combat Readiness

Ukraine’s armed forces are testing the combat readiness of troops, the Defense Ministry said yesterday on its website, reiterating the government’s desire for a peaceful end to the standoff in the former Soviet republic’s eastern provinces.

Russia, which has vowed to defend the ethnic Russians that dominate Crimea after an uprising in Kiev, accused Ukraine of ignoring radicals in the nation’s east.

JPMorgan Chase & Co.’s G7 Volatility Index dropped to 7.33 percent, the least since December 2012.

The euro dropped versus 14 of its 16 major counterparts as Constancio was reported by Market News International as saying comments made by ECB President Mario Draghi at the central bank’s policy meeting “were not taken in completely.”

“Another element in the statement of the president that was not picked up by analysts and the markets” was “the statement that indeed our forward guidance regarding stable or lower rates is seen as a guidance that goes beyond a simple improvement in the situation,” he was quoted a saying.

ECB Decision

The euro rallied last week as ECB policy makers left interest rates on hold at a record low 0.25 percent on March 6 and said inflation will quicken toward the central bank’s 2 percent target in 2016.

“The ECB is sending us a signal that the markets have, again, misunderstood the message that the governing council was trying to convey,” Valentin Marinov, head of European Group- of-10 currency strategy at Citigroup Inc. in London, wrote in a research note. “This could mean that the euro may have to pare the gains we saw in the immediate aftermath of the meeting.”

New Zealand’s dollar rose for a second day before the Reserve Bank announces its rate decision on Thursday. Policy makers will increase the Official Cash Rate to 2.75 percent from 2.5 percent, according to a Bloomberg survey of economists.

The kiwi advanced 0.1 percent to 84.78 U.S. cents after climbing to 85.23 cents on March 7, the highest since Oct. 22.

The yen was little changed after the Bank of Japan reiterated it will maintain monetary stimulus.

The BOJ kept its pledge to expand the money supply at a pace of 60 trillion yen to 70 trillion yen a year, in line with all but one forecast in a Bloomberg survey of 34 economists.

“It would have been a massive surprise if the Bank of Japan did something today, and hence the dollar-yen has been pretty stable,” said Greg Gibbs, head of Asia Pacific markets strategy at Royal Bank of Scotland Group Plc in Singapore. “We’ve still got a rates-on-hold strategy from the major central banks, and while rates are on hold, it’s a reason you could see currencies trade in narrower ranges.”

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