FOREX-Euro falls as central bankers pledge inflation fight

Thu Apr 3, 2014 9:56am EDT

Related Topics

* Euro falls 0.40 percent against dollar

* European policymakers more dovish than expected-strategist

* Yen sets fresh 10-week low versus dollar

* Non-farm payrolls key to further dollar gains (Adds euro drop, Draghi and strategist comments, changes byline, dateline; previous LONDON)

By Michael Connor

NEW YORK, April 3 (Reuters) - The euro dropped on Thursday after the European Central Bank kept interest rates on hold and pledged to use unconventional measures if needed to battle low inflation in the euro zone.

The currency shared by 18 nations dipped as low as $1.3736 during a news conference by ECB President Mario Draghi and later declined as low as $1.3711.

The euro last stood off 0.40 percent against the dollar at $1.3716 and was down 0.14 percent against the British pound and 0.25 percent against the Japanese yen.

"The (ECB's) Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation," Draghi told the news conference.

Euro zone annual inflation ticked down to 0.5 percent in March, its lowest since the economy was deep in recession in 2009, and its sixth month in what Draghi has described as "the danger zone" below 1 percent.

"The ECB is being slightly more dovish than the market expected," said Kathy Lien, managing director at BK Asset Management in New York. "The main takeaway is that the council is considering unusual techniques, and that's negative for euro/dollar."

The euro's decline fed a rally in the dollar, with the U.S. dollar index up 0.27 percent to 80.418 in early New York trading.

The dollar was up against the yen at 103.95 yen after touching a high of 104.06, a level last seen on Jan. 23.

Unlike in January and February, there had been few if any mainstream voices in the market predicting action from the ECB in the form of a cut in its official interest rates.

The main move of the past two weeks on major currency markets has been the dollar's steady march higher against the yen, awakening hopes that the greenback may finally be set to deliver on the break higher predicted by many banks in January.

The dollar has gained almost 3 percent against the yen since U.S. Federal Reserve chief Janet Yellen told markets on March 19 that the Fed might raise interest rates next spring. U.S. jobs data on Friday may be the decisive factor for any further gains.

"There is a lot of resistance (to more dollar gains) around 104 yen and we may not break that today," said a dealer with one bank in London. "The key to any move higher will be non-farm payrolls tomorrow."

LOW-FLATION

International Monetary Fund Managing Director Christine Lagarde on Wednesday called on the ECB to ease policy, warning "low-flation" in advanced economies risked undercutting an already sluggish global recovery.

But U.S. data has generally improved after a dip in fortunes now put down largely to harsh winter weather. Worries over China and Ukraine that prompted investors to seek the relative security of the yen have also slipped at least momentarily off the agenda.

A Reuters poll of over 60 foreign exchange strategists taken this week predicted the euro would fall to $1.37 in one month, $1.33 in six and $1.29 in a year.

Steen Jacobsen, chief investment officer with leading retail FX platform Saxobank, sees the euro sinking to $1.25 this year on the back of more aggressive action later in the year to ease monetary conditions.

"You may argue that there is no real reason flows-wise for the euro to weaken, but I think for the lobbies and policymakers $1.40 is a line they cannot cross," he said. "I think it will get there and that will lead to action." (Additional reporting by Patrick Graham in London; Editing by Chizu Nomiyama)

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