FOREX-Euro drops after ECB holds rates unchanged, warns on Ukraine

Thu Aug 7, 2014 4:32pm EDT

Related Topics

* ECB holds rates steady, to stay low for extended period

* U.S. weekly jobless claims drop unexpectedly

* Russia-Ukraine tensions spur safe-haven yen buying (Updates with late New York prices, adds NATO comment)

By Daniel Bases

NEW YORK, Aug 7 (Reuters) - The euro weakened on Thursday, undermined by the European Central Bank saying it would leave interest rates unchanged at record lows and that the fragile economic recovery will keep the loose policy in place for an extended period.

The ECB's decision was not unexpected by the market and it heightened the contrast in monetary policy, with the euro zone moving toward easing and the United States moving toward tightening on an improving economic outlook.

Positive sentiment about the U.S. economy was helped by better-than-expected weekly U.S. jobless claims.

Since May, the euro has dropped 4.6 percent against the dollar, hitting a 9-month low of $1.3333 on Wednesday.

"Nothing really has changed here with the ECB and since that's the case, we're simply consolidating the prices," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

"The bigger risk in the market is the downside for the euro. I think it bears out Draghi's point in that the market already accepts (Europe's) economic recovery is fragile, moderate and uneven," he added, referring to comments from ECB President Mario Draghi earlier on Thursday.

Following the bank's monetary policy meeting, Draghi said the Ukraine crisis has added to risks surrounding the euro zone's weak and uneven economic recovery.

The head of NATO called for Russia to "step back from the brink" of war by pulling its troops back from the Ukrainian border and warned Moscow risked further isolation.

Russian-backed rebels shot down a Ukrainian Mig-29 fighter plan and a military helicopter on Thursday.

Early dollar strength was siphoned off by sagging U.S. equities and a rally in U.S. Treasuries that pushed the 10-year yield to 2.41 percent, a 10-week low.

"Fears Russia might invade put a lot of flow back into fixed income and massive downward pressure on dollar/yen. This also drove equities lower. Those headlines were basically pounding both markets down today," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

In late New York trade, the euro edged off from the session low of $1.3336, trading down 0.12 percent at $1.3365.

The dollar gave up gains on the yen made after news that Japan's public pension fund plans to increase asset allocations to the domestic stock market. The dollar fell 0.09 percent to 102 yen.

The U.S. dollar index held just below an 11-month high reached on Wednesday.

The Bank of England also left its benchmark interest rate unchanged at a record low 0.5 percent. Sterling fell 0.12 percent to $1.6832.

The Aussie dollar fell after an unexpected jump in Australia's jobless rate, dropping 0.9 percent to $0.9268 , having earlier hit $0.9263, its lowest level since early June. (Reporting by Daniel Bases; Additional reporting by Patrick Graham in London, Masayuki Kitano in Singapore, and Ian Chua in Sydney; Editing by Dan Grebler and Tom Brown)

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