May 2, 2013 / 3:10 PM / 5 years ago

FOREX-Euro hit by prospect of negative deposit rates

* Euro falls sharply after Draghi’s comments on deposit rates

* ECB cuts benchmark rates as expected, says policy to remain accommodative

* U.S. economic data lifts dollar versus yen

By Wanfeng Zhou

NEW YORK, May 2 (Reuters) - The euro fell sharply against the dollar in choppy trading on Thursday after European Central Bank President Mario Draghi said the bank is technically ready for negative deposit rates and noted downside risks to the economy.

Draghi’s comments came after the ECB cut its benchmark refinancing rate by 25 basis points to a record low 0.5 percent, its first cut in 10 months and left the deposit rate unchanged.

A negative deposit rate would mean having to pay for holding euro deposits and would discourage investors from holding euros.

“The fact that Draghi is leaving the door open for the prospects of negative deposit rates is a medium- to long-term euro negative,” said Paresh Upadhyaya, director of currency at Pioneer Investments in Boston.

“It certainly opens the door for capital outflows, and that’s what makes it essentially a game changer in terms of the euro.”

The euro fell 0.8 percent to $1.3073, having hit a session low of $1.3058, according to Reuters data.

“Although Draghi reiterated that the ECB was technically prepared for a cut in the deposit rate, in the past he had warned about the potential negative consequences. Now he is saying (he) has an open mind,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

The euro had risen to a session peak of $1.3215 earlier after Draghi said the central bank’s monetary policy will remain accommodative for as long as needed, which boosted hopes further stimulus will help the euro zone’s economy to recover.

Highlighting the fragility of economy, surveys on Thursday revealed a deepening contraction in manufacturing in April.

Against the yen, the euro fell 0.3 percent to 127.98 yen .

The dollar rose 0.5 percent to 97.91 yen, having earlier risen 1 percent after data showed the number of Americans filing new claims for jobless benefits fell sharply last week to a five-year low while the U.S. trade gap narrowed in March.

The Japanese central bank will monitor whether its monetary easing could have an unintended spillover effect on emerging economies, Bank of Japan Governor Haruhiko Kuroda said on Thursday.

Investors’ focus now shifts to Friday’s U.S. non-farm payrolls report for April. Economists polled by Reuters are looking for job growth of 145,000 last month, up from 88,000 for March. The unemployment rate is seen holding steady at 7.6 percent.

If the jobs data adds to recent signs of a softening in the U.S. economy, it would intensify speculation that the Federal Reserve’s next move is more likely to be to increase debt purchases, which would pressure the dollar.

The Fed said on Wednesday it will continue buying $85 billion in bonds each month to keep interest rates low and spur growth. The Fed added it would step up purchases if needed to protect the economy.

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