FOREX-Euro down after ECB Draghi's comments on euro zone outlook

Thu Feb 7, 2013 9:53am EST

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NEW YORK Feb 7 (Reuters) - The euro fell to a one-week low against the dollar and sank against the yen on Thursday after ECB President Mario Draghi said risks to the bank's outlook for the euro zone were to the downside and that the exchange rate is important for growth and price stability.

The euro had earlier maintained gains after the European Central Bank held its main interest rate at a record low of 0.75 percent on Thursday.

The 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.

But as Draghi began to speak at a press conference after the official rate announcement, the euro surrendered gains as investors heard his view that while economic activity in the euro area should gradually recover later in 2013, there are more negative risks than positive ones.

The euro then fell to session lows when 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.".

"Clearly he does not want to see the euro go much higher," said Boris Schlossberg, managing director at BK Asset Management in New York. "There is massive pressure from the French. He is signalling displeasure that it ran up so much."

The euro was last at $1.3443, down 0.6 percent on the day , with the session low at $1.3427. The euro was down 0.7 percent against the yen at 125.78 yen with the session low at 125.53 yen.

Before Thursday's declines the euro had risen more than 2 percent against the greenback so far this year and over 10 percent versus the yen.

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

"They are cautious comments and leaving the door open for further rate cuts in Europe," said David Song, currency analyst at DailyFX in New York, about Draghi's press conference.

But while the French have raised concerns a strong euro could derail exports and threaten a nascent euro zone recovery, the Germans have said the shared currency is not overvalued.

The euro zone economy contracted in the second and third quarters of last year, meeting the technical definition of recession, and the downturn is expected to have deepened in the fourth quarter.

"The economic weakness in the euro area is expected to prevail in the early part of 2013," Draghi told the news conference.

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

The dollar was down 0.1 percent against the yen at 93.53 yen , still within reach of the peak touched on Wednesday, the highest since May 2010.

Sterling rose on Thursday after incoming Bank of England governor Mark Carney showed little bias towards immediate looser monetary policy, wrong footing many investors who had expected him to be more dovish.

The pound rose 0.2 percent to $1.5770 as investors who had bet on hints of more aggressive easing measures from Carney, who takes the helm in July, covered their short positions.

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

Traders cited buying by an Asian central bank, before sterling ran into offers around the $1.5775-90.

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