* ECB's Draghi reiterates warning about QE, negative rates
* Euro/dollar implied vols crushed, at lowest since 2007
* Yen firm as Tokyo shares slip on lack of US-Japan trade
(Recasts, adds fresh comments)
By Anirban Nag
LONDON, April 24 The euro gave up gains against
the dollar on Thursday, after ECB President Mario Draghi once
again flagged the risk of asset purchases to ward off deflation
risks and said a rise in the euro could trigger policy action.
After two days of gains, the euro slipped to $1.3820
following Draghi's comments, leaving it a tad firmer on the
week. It had earlier risen to a session high of $1.38435 after
after an upbeat German IFO survey.
While stressing that the ECB sees inflation remaining low
for a prolonged period before rising again, Draghi said the
European Central Bank could embark on a broad-based asset buying
plan if the euro zone inflation outlook worsens.
Draghi also warned that a rise in the currency that
effectively tightened monetary policy could trigger policy
action, including a negative deposit rate. "The exchange rate is
an increasingly important factor in our assessment of the
outlook for price stability," he said.
But traders said further euro losses were unlikely until the
ECB backed up these words with action. The euro is also being
supported by falling excess liquidity in the euro
zone banking system, a factor that keeps overnight rates
elevated and adds to the currency's allure.
"Draghi's speech did not add anything new, but amplifies the
importance of next week's inflation numbers," said Jeremy
Stretch, head of currency strategy at CIBC World Markets.
"If inflation doesn't jump as the ECB is expecting, it could
be a catalyst for further action. Until then, we expect the euro
to trade in ranges."
Apart from signs of a recovery in the euro zone, as
reflected in yesterday's PMI surveys and Thursday's IFO report,
there have been a number of factors behind the euro's strength.
These include renewed inflows into euro zone peripheral bonds
and stocks and the fact that euro zone banks are repaying the
ECB's cheap loans, shrinking its balance sheet at a time when
the Federal Reserve and the Bank of Japan are expanding theirs.
Many euro zone banks have meannwhile been cutting their
presence abroad, selling assets and repatriating money to meet
capital and stress test requirements. These inflows allow the
euro zone to maintain a healthy current account surplus and
support the common currency.
Implied volatilities in the euro/dollar pair have
also fallen to levels last seen in mid-2007, highlighting
expectations that the currency is likely to trade in a range.
A drop in implied volatility, which is a gauge of how sharp
swings in a currency will be, is likely to underpin demand for
riskier and growth-linked currencies, analysts said.
The higher-yielding New Zealand dollar climbed to a one-week
high of $0.8638 after the country's central bank said
it would continue to tighten policy to stay on top of
inflationary pressures. As expected, it hiked its cash rate to
3.0 percent from 2.75 percent.
"Currencies that are likely to benefit in this environment
(of low volatility) are the 'fragile five' emerging market
currencies, and the New Zealand dollar in the G10," said David
Bloom, global head of FX strategy at HSBC.
The 'fragile five' are the Turkish lira, the South
African rand, the Brazilian real, the Indonesian
rupiah and the Indian rupee.
The safe-haven yen rose against the dollar as Tokyo shares
fell nearly 1 percent, after Japanese Prime Minister
Shinzo Abe said that a trade deal with the United States had not
been finalised yet.
Mollifying Japan's powerful farming lobby and completing a
successful trade pact is seen as a key test of whether Abe can
deliver the "third arrow" - structural reform - to go with
fiscal and monetary stimulus measures already deployed.
The dollar last fetched 102.41 yen, down 0.1 percent.
(Additional reporting by Masayuki Kitano; Editing by Catherine