* Markets cautious that euro strength may concern ECB
* Most feel Draghi won't explicitly mention euro moves
* Sterling slips from high after BoE flags downside risks
By Anooja Debnath
LONDON, Feb 7 The euro rose on Thursday on
interest from Asian sovereign investors and macro funds, but
many refrained from aggressive buying as they anticipated
European Central Bank comments on its strength.
The euro was little changed after ECB kept interest rates on
hold, as expected, with investors on awaiting comments from
President Mario Draghi at a 1330 GMT news conference about how
the currency's gains might affect the fragile euro zone economy.
While the chances of Draghi voicing any concern are slim,
given trade-weighted euro has risen modestly since
early last month, any hint of discomfort could drag the currency
On the other hand, if he sounds unconcerned about the euro's
rise and reiterates the G20's commitment to market-determined
exchange rates, the euro is likely to bounce and could retest
"The key question Draghi will be asked is about currency
wars," said Neil Mellor, currency strategist at Bank of New York
"He will likely say currency moves should be set by the
markets, leading most to assume that the ECB is not prepared to
do anything and the euro will probably go a little higher at the
end of the meeting."
The euro was up 0.3 percent at $1.3565, holding
steady after the rate decision. Analysts said it could retest
yesterday's high of $1.3597 and move towards $1.38 and beyond in
coming weeks if Draghi did not appear too concerned about its
The currency had hit a 15-month high of $1.3711 on Feb. 1.
If Draghi expressed concern, the currency could swiftly drop
to its Jan. 29 low around $1.3414 and possibly lower, they said.
Against the yen, the euro was up 0.4 percent at 127.10 yen
, not far from its 34-month high of 127.71 yen hit on
Wednesday. Traders cited stop loss sell orders at 127.50 yen and
127.70-75 yen, which could cap its gains for now.
The euro has risen nearly 3 percent against the greenback so
far this year and over 11 percent versus the yen. This has
triggered unease among some European politicians.
The French have raised concerns a strong euro could derail
exports and threaten a nascent euro zone recovery, but the
Germans have said the shared currency is not overvalued.
Draghi sounded optimistic about a euro zone recovery last
month, helping set the stage for a sharp euro rally. But this is
unlikely to be enough to prompt the ECB chief to explicitly talk
about the euro.
"Previous ECB President Jean-Claude Trichet had used the
term "brutal" to describe euro gains," said analysts at Morgan
Stanley in a note. "However, we do not believe that the current
euro rise is yet at the stage where it is impacting the ECB's
monetary stability mandate, requiring verbal intervention."
Other potential risks to the euro would come from any
comments Draghi makes on his connection to an Italian banking
scandal, and on the recent rise in money market interest rates
after some banks repaid ECB loans early.
"What Draghi might do is address concerns about declining
liquidity in the euro zone and assure markets there is plenty of
liquidity and it is too soon to tighten monetary conditions,"
said Elisabet Kopelman, FX and FI strategist at SEB.
A Spanish bond auction earlier on Thursday drew healthy
demand but a slight rise yields on the short-dated paper limited
gains in the euro.
The dollar was flat against the yen at 93.65 yen, not
far from its 33-month peak around 94.075 yen hit on Wednesday.
U.S. speculative accounts were still actively buying the dollar
on dips, with stop-loss orders said to be placed at 93.20 yen
and just below 93 yen.
Sterling hit a session high of $1.5768 after incoming Bank
of England governor Mark Carney showed little bias towards
immediate looser monetary policy, wrongfooting many investors
who had expected him to be more dovish.
It gave up some of those gains to trade at $1.5705
after the Bank of England kept policy unchanged, as expected,
but flagged downside risks to the economy.