FOREX-Euro holds ground even as ECB launches low inflation fight

Thu Jun 5, 2014 11:12am EDT

Related Topics

(Updates with ECB comments, U.S. data, changes byline, changes dateline previous LONDON)

* Euro hits four-month trough after ECB cuts interest rates

* ECB for first time moves to negative rates to boost lending

* U.S. dollar index rises to four-month high

* U.S. jobless claims increase, but jobs market still strengthening

By Daniel Bases

NEW YORK, June 5 (Reuters) - The euro rebounded from four-month lows on Thursday, brushing aside the European Central Bank's decision to cut interest rates and announce an array of measures to loosen monetary policy in order to halt a disinflation trend.

The ECB cut all its main rates to record lows in a drive to fight off the risk of a Japan-like deflation and bring down the euro's exchange rate. For the first time, it will charge banks 0.10 percent for parking funds at the central bank overnight.

The euro had been trading in a tight range heading into the decision, coming one day before the U.S. jobs report that is expected to show slowing employment growth but unlikely to affect a change in loose U.S. monetary policy.

ECB President Mario Draghi stopped short of large-scale asset purchases known as quantitative easing, which is meant to keep interest rates low and spur borrowing. Draghi said more action would come if necessary.

Inflation expectations however were revised lower by the ECB, pulling them farther away from its 2 percent target.

"I think that highlights that inflation is trending significantly lower and below (market) expectations and so I think part of the concern is, is the ECB already too late and will they live up to their words," said Camilla Sutton, currency strategist at Scotia Capital in Toronto.

The euro fell sharply in the wake of the ECB's announcements, hitting a fresh four-month low of $1.3504, according to Thomson Reuters data. However, it slowly ground its way back from those losses to $1.3610, a gain of 0.10 percent on the day.

Against Japan's currency, the euro recovered ground in similar fashion, but still registered a small loss of 0.16 percent at 139.48 yen.

Specifically, the ECB cut the deposit rate to -0.10 percent, the main refinancing rate to 0.15 percent, and the marginal lending rate - or emergency borrowing rate - to 0.40 percent.

Morgan Stanley analysts reckon the imposition of negative rates could lead to an exodus from euro zone money markets. They expect U.S. money market funds, which have holdings of around 350 billion euros in the euro zone, to liquidate some of their holdings, putting downward pressure on the euro.

The dollar index hit a four-month high of 81.020.

The yen, meanwhile, appeared to be stabilising after falling in the past few sessions. The dollar lost 0.3 percent to 102.42 yen, down slightly from a one-month high of 102.80 yen set on Wednesday. (Additional reporting by Anirban Nag in London; Editing by Hugh Lawson/Ruth Pitchford and Nick Zieminski)

FILED UNDER: