FOREX-Euro tumbles on ECB Draghi's currency comment, outlook

Thu Feb 7, 2013 2:15pm EST

Related Topics

* Euro sinks vs dollar, yen as ECB's Draghi comments seen as cautious

* Draghi says euro zone risks to the downside

* ECB leaves benchmark interest rate unchanged

* PIMCO sees euro in $1.30-$1.40 range next 3-6 months

By Julie Haviv

NEW YORK, Feb 7 (Reuters) - The euro slid against the dollar and yen on Thursday after European Central Bank President Mario Draghi voiced concerns about the impact of the currency's exchange rate on the economy, opening the door for a possible rate cut should the euro extend its recent climb.

The euro slipped for a second straight session against the dollar and yen as Draghi spoke at a press conference after the ECB held its benchmark interest rate steady at 0.75 percent.

He said while economic activity in the euro area should recover gradually in 2013, there are more negative risks than positive ones. Draghi also said the euro's exchange rate was near to its long-term average, going further than many analysts had expected.

Draghi said "the exchange rate is not a policy target, but it is important for growth and price stability and we certainly want to see whether the appreciation is sustained."

"Draghi's comments were neutral to modestly dovish, which means a rate cut is still on the table," said Ben Emons, senior vice president/global portfolio manager, at Newport Beach, California-based PIMCO, which had $2 trillion in assets as of Dec. 31.

"If the euro puts too much pressure on CPI (consumer price index), the ECB may have look at more liquidity operations or a potential rate cut to offset the downward pressure on prices," he said.

The euro last traded at $1.3394, down 0.9 percent on the day, after earlier sliding to a trough of $1.3369, the lowest since Jan. 25. At the session low, it was the biggest one-day percentage drop since June.

"Interest rate differentials are the main driver of the euro's move today," Emons added. "The ECB is not in a position to change policy right now due to fragmentation, with financial market conditions looking very good, but credit conditions in some European economies not."

Emons, who oversees $70 billion in global assets, said the euro will likely remained contained to a range of $1.30 to $1.40 for the next three to six months.

"I am not overly bullish on the euro, but I also do not see much scope for a significant change in either direction," he said.

The ECB's interest rate announcement was a reiteration of the bank's policy to see whether an economic recovery sets in later this year or is derailed by the euro's rise.

Against the yen, the euro last traded at 125.08 yen, down 1.2 percent, but above the session low of 124.48 yen.

Despite Thursday's declines, the euro is up about 1.5 against the greenback so far this year and around 9.3 percent versus the yen.

The Feb. 1 appreciation of the euro to its highest against the dollar since November 2011 prompted French President Francois Hollande to recently call for an exchange rate policy to protect the currency from "irrational movements."

A persistently strong euro could derail exports and threaten the euro zone's nascent economic recovery. German officials have said the shared currency is not overvalued.

OVERSHOOT

But some analysts cautioned that the selloff in the euro may be too far, too fast and only short term.

Christopher Vecchio, currency analyst at DailyFX in New York, noted Draghi also said the high euro is a sign of confidence in the region.

"Any further euro losses should be limited beyond the initial kneejerk that we've seen thus far today," said Vecchio.

A Spanish bond auction on Thursday drew healthy demand, but a slight rise in yields on the short-dated paper limited gains in the euro.

The dollar last traded at 93.42 yen, down 0.2 percent on the day, according to Reuters data. It remained within reach of the peak of 94.06 touched on Wednesday, which was the highest since May 2010.

"The yen has some scope to depreciate further, perhaps to 95-98," said PIMCO's Emons.

"I do not see 100 yen, but a lot will hinge on who the next Bank of Japan governor is and whether he is going to signal more aggressive monetary policy action," he said.

Elsewhere, the Bank of England said it was keeping interest rates on hold at 0.5 percent and its quantitative easing total unchanged at 375 billion pounds.

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.