FOREX-Euro hit by dovish Draghi, dollar powers up

Sun Aug 24, 2014 7:28pm EDT

Related Topics

* Euro falls to lowest in nearly a year against the USD

* Dollar index extend gains, up near one-year peak

* Euro zone inflation data key this week

By Ian Chua

SYDNEY, Aug 25 (Reuters) - The euro fell to its lowest in nearly a year against a broadly firmer dollar on Monday after comments from the head of the European Central Bank raised prospects of more policy easing as early as next week.

The common currency skidded to $1.3185 in early trade, from around $1.3246 late in New York. It also lost ground against many other currencies, notably hitting a near 10-month low on the Australian dollar at A$1.4163.

That helped lift the dollar index towards its Sept. 5 peak of 82.671. A break above will take it to levels not seen since July 2013.

In a stronger language than he has used in the past, ECB President Mario Draghi on Friday stressed the central bank is prepared to respond with all its "available" tools should inflation drop further.

"Even more significantly, Draghi departed from the script originally published on the ECB's website on delivery, adding a section on inflation expectations during August," said Ray Attrill, global co-head of FX strategy at National Australia Bank.

"He noted a decline in short, medium and longer term inflation expectations and indicated this would be acknowledged at the Sept meeting. So it looks like more easing ahead..."

The ECB holds its next policy review on Sept 4.

Ahead of that, euro zone inflation data due on Friday will be closely watched. Analysts polled by Reuters expect annual inflation to have slowed to 0.3 percent in August from 0.4 percent in July. That is well below the ECB's danger zone of 1.0 percent and its target of just under 2.0 percent.

In contrast, Federal Reserve Chair Janet Yellen on Friday nodded to the concerns of some Fed officials about the sustained level of monetary policy stimulus, even as she stressed the need to move cautiously on raising rates.

"The Jackson Hole summit brought nothing new on the timing of the Fed's first rate hike, but it confirmed a symmetrical conditional shift in the Fed's labour-centred forward guidance towards potential earlier rates lift-off before mid-2015," said Lena Komileva, chief economist at G+ Economics.

As a result, Fed funds futures fell back <0#FF:> as the market priced in the risk of an earlier move on rates. Yields on two-year Treasury paper climbed over 8 basis points for the week, the largest such rise since June last year, while the yield curve flattened markedly.

That is helping the dollar outperform broadly. It hit a seven-month high against the yen at 104.49 before pulling back slightly to stand at 104.22. The New Zealand dollar plumbed a six-month low at $0.8336.

Traders said the market might have already seen the trading range for the day in Asia with little in the way of market-moving economic data. A bank holiday in Britain will ensure a quiet start to the European session as well. (Editing by Shri Navaratnam)

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