FOREX-Euro rebounds as Draghi quashes easing expectations

Thu Mar 7, 2013 2:02pm EST

Related Topics

* ECB holds rates steady, gives no hint of further easing
    * Euro also boosted as Spain hits top end of target at bond
sale
    * Dollar/yen hits highest since August 2009


    By Gertrude Chavez-Dreyfuss
    NEW YORK, March 7 (Reuters) - The euro rallied on Thursday,
on track for its largest one-day gain in two months against the
dollar, as European Central Bank President Mario Draghi gave no
indication the bank would cut interest rates further in the euro
zone. 
    The ECB, which kept interest rates steady, had been expected
to lower its inflation and growth forecasts, giving Draghi room
to cut rates and support recession-hit economies in the coming
months. The bank did lower its growth forecast for the currency
bloc for 2013, but Draghi said he expects economic activity to
gradually recover given firming global demand.
    He also said inflation expectations "remain firmly
anchored," in line with the ECB's aim of maintaining inflation
rates below but close to 2 percent over the medium term. That
should allow the ECB's monetary policy stance to stay loose.
 
    The ECB chief also said people have underestimated the 
political commitment to the euro at their own cost. 
    "Draghi played cheerleader, transmitting a bit of hope to
the euro FX rate but leaving no room for an added ECB boost to
the business cycle," said Dan Dorrow, head of research, at FX
broker Faros Trading in Stamford, Connecticut.
    But he added that despite the euro's appreciation, he viewed
Thursday's ECB comments including the growth and inflation
forecasts as negative for the euro zone's shared currency in the
medium term.
    "Growth differentials will increasingly matter for FX rates
in a global environment with receding tail risks," said Dorrow.
"The ECB is the most behind the curve among G4 central banks
(U.S., UK, euro zone, and Japan) in terms of providing policy
support for the business cycle -- despite the fact that the euro
zone's growth outlook is the worst among the G4 economies."
    The euro was up 1.1 percent on the day at $1.3105.
The session peak of $1.3116 marked a five-day high. Some US$5.2
billion in euros changed hands using Reuters Dealing..
    Healthy demand at a Spanish debt auction also eased some
investor concerns about the euro zone. Spain sold 5 billion
euros of bonds, hitting the top end of its targeted amount at
reduced borrowing costs despite political uncertainty in Italy.
 
    Marc Principato, director of SMB Forex Trading And Education
in New York, said the single currency, after breaching minor
resistance at $1.3050, faced significant challenges between
$1.3250 and $1.3300 in the coming week.
    Most analysts say even if borrowing costs for highly
indebted euro zone countries like Spain and Italy do not rise,
on a more fundamental basis the struggling euro zone economy
will need a more accommodative monetary policy stance along with
a weaker currency to boost growth.
    Against the yen, the euro surged nearly 2.1 percent to
124.57 yen, its highest in more than a week. The euro
was also on pace for its best one-day performance in a month and
a half versus the yen.
                
    STERLING JUMPS
    Sterling rebounded from a 2-1/2-year low against the dollar
 and last traded at $1.5026, little changed , after the
Bank of England decided not to resume its quantitative easing
program. 
    Many investors had bet against the pound in recent weeks on
expectations that a grim UK economic outlook would prompt the
central bank to pump in more liquidity. The BoE's bank rate is
at a record low of 0.5 percent.
    Against the yen, the dollar was up 0.9 percent at 94.94 yen
, after touching a session peak of 95.06, the highest
since August 2009. Some US$2.7 billion in yen changed hands
using Reuters Dealing.
    Earlier on Thursday, the Bank of Japan kept monetary policy
unchanged but the yen weakened against the dollar on
expectations of aggressive easing in the future. Some
strategists have revised their forecasts to show sustained yen
weakness. 
    UBS raised its year-end forecast for the dollar to 100 yen
from 85 yen.
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