FOREX-Euro steadies after slumping on dovish Draghi comments

Fri May 9, 2014 12:07am EDT

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By Shinichi Saoshiro

TOKYO, May 9 (Reuters) - The euro struggled to gain traction on Friday after dovish comments from European Central Bank President Mario Draghi the previous day sent the currency tumbling from a 2-1/2 year high.

The single currency held steady at $1.3839, having pulled back from a peak of $1.3995 set on Thursday on trading platform EBS, the highest since October 2011.

Draghi said the euro's strength was "a serious concern" and that the ECB bank might act to stem falling inflation at its June meeting, signalling possible easing.

Before Draghi's comments, the single currency had surged after the ECB on Thursday kept monetary policy unchanged as expected.

While it has not drawn a line in the sand, traders say the ECB, which has focused on the euro's strength in the past few weeks, gets uneasy when the euro rises towards $1.40. A Reuters poll on Wednesday showed most economists expect ECB action if the euro hits $1.42.

"The focus going forward is what the ECB actually does in June, with a rate cut and a negative deposit rate being the expected course of action," said Shinichiro Kadota, chief Japan FX strategist at Barclays in Tokyo.

"But rates are already low at 0.25 percent that even if the ECB does lower it the impact will be limited, and this will not be effective in curbing euro strength," Kadota said, adding that expectations will quickly build towards next possible steps like provision of liquidity and ultimately quantitative easing.

The dollar was little changed at 101.70 yen, still not very far from a three-week low of 101.43 yen set on Wednesday.

For the week, the greenback is down 0.5 percent against the yen, weighed down by persistently dovish comments from the Federal Reserve and low U.S. Treasury yields.

"If you ask whether dollar/yen is going to head higher or lower, I think downside risks are increasing," said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore, adding that the greenback could head gradually lower against the yen.

Simmering tensions in the Ukraine have also supported the safe-haven yen currency and the market kept an eye on a May 11 separatist referendum.

Pro-Russian separatists voted unanimously on Thursday in favour of holding a referendum on independence, defying calls by Russian President Vladimir Putin to postpone the vote to open the way for talks with the Kiev authorities.

The Australian dollar eased 0.1 percent to $0.9364, edging away from a three-week high of $0.9395 hit on Thursday, when it gained a lift from upbeat Australian and Chinese economic data. (Additional reporting by Masayuki Kitano in Singapore; Editing by Kim Coghill)

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