* Euro strength will be monitored, Draghi said
* Merely takes note of Irish bank debt proposal
* On Monte Paschi, says BoI did all it should have
* ECB holds main interest rate at 0.75 pct, as expected
By Eva Kuehnen
FRANKFURT, Feb 7 The European Central Bank will
monitor the economic impact of a strengthening euro, ECB
President Mario Draghi said on Thursday, feeding expectations
the climbing currency could open the door to an interest rate
After the ECB left its main interest rate at 0.75 percent on
Thursday, Draghi said the exchange rate was near to its
long-term average but went further than many analysts had
"The appreciation is, in a sense, a sign of return of
confidence in the euro," Draghi told a news conference.
"The exchange rate is not a policy target, but it is
important for growth and price stability and we certainly want
to see whether the appreciation is sustained and will alter our
risk assessment as far as price stability is concerned."
The euro hit a 15-month peak of $1.3711 on Feb. 1. It
traded below that level on Thursday and fell to a one-week low
against the dollar and sank against the yen after Draghi's
French President Francois Hollande said on Tuesday the euro
zone must develop an exchange rate policy to protect the
currency from "irrational movements". Germany has been cooler to
any thoughts of exchange rate action.
By linking the euro's exchange rate to growth and price
stability, Draghi achieved a deft piece of verbal intervention,
"This hints that euro strength -- if sustained -- could
eventually trigger a rate cut," said Nick Kounis at ABN Amro.
Carsten Brezeski at ING added: "Draghi successfully tried to
talk down the euro exchange rate and opened the door for
possible policy action."
Last month, Draghi unwound earlier expectations of a rate
cut by citing a batch of improving economic indicators. But
since then the euro has appreciated further.
The ECB's room for manoeuvre is limited, however. Even if it
wanted to, the bank's statutes mean it is ill-equipped to join a
currency "race to the bottom".
Furthermore, the world's other top central banks are
expanding their balance sheets by printing money, or at least
not reversing course, while the ECB's balance sheet is
tightening, partly due to banks paying back early cheap money
the central bank doled out last year.
A by-product of that could be to drive the euro yet higher.
IRISH DEBT DEAL
Although it took no monetary policy action, the ECB and
Ireland reached a compromise on a long-standing dispute over the
cost of servicing money borrowed for a failed bank.
Dublin rushed through emergency legislation early on
Thursday to liquidate failed Anglo Irish Bank as part of a
compromise to avoid paying 3.1 billion euros a year until 2023
on money it took for the stricken lender during a meltdown of
the main Irish banks in 2008.
Draghi merely said the ECB "took note of the Irish
operation" but Irish premier Enda Kenny stood up in parliament
and declared the deal done that could go a long way to allowing
Ireland to quit its bailout programme this year.
Draghi gave a similar view on the state of the euro zone
economy to the one he gave in January. Economic weakness was
"expected to prevail in the early part of 2013" but later in the
year, activity should gradually recover.
He said the recent move by banks to pay back early about 140
billion euros of cheap three-year money the ECB gave them last
year was a positive sign.
"This reflects the improvement in financial market
confidence," Draghi said, adding that the ECB would watch to see
if the money market tightened conditions by stealth.
"We will closely monitor conditions in the money market and
their potential impact on the stance of monetary policy, which
will remain accommodative," he said.
A Reuters poll of economists last week suggested official
ratest would not change until at least July 2014.
Draghi was pressed about what he knew of the derivatives
scandal at Siena's Monte dei Paschi bank, and what he
did about it when he headed Italy's central bank from 2006 to
Italy's third largest and oldest bank has been at the centre
of a financial and political storm, facing losses of about 1
billion euros from a series of derivatives and structured
finance trades and after a 9-billion-euro acquisition of smaller
rival Antonveneta which left it badly weakened.
Draghi said there was no implications for the ECB's future
role as a European bank regulator.
"The IMF has publicly stated that their preliminary view is
that the Bank of Italy took timely and appropriate action within
the limits of legal framework to address problems at (Monte dei
Paschi)," he said. "Oversight was close and supervisory action
escalated appropriately as (the bank's) problems became acute."
A senior Italian central bank source told Reuters this week
that Draghi was informed of doubts raised by Bank of Italy
inspectors but had little control over what has been widely
criticised as ineffective oversight of the stricken lender.
He has already faced criticism with former Italian economy
minister Giulio Tremonti said it was "stupefying" that in his
role as supervisor of Italy's banking system Draghi failed to
discover or prevent loss-making derivatives trades at Monte dei