LONDON (Reuters) - The euro jumped to a nine-day high on Thursday and bond yields fell as the European Central Bank broadly stuck to its outlook for growth and inflation while expressions of concerns at the single currency’s strength were insufficient to rein it in.
ECB President Mario Draghi referred several times in his post-meeting news conference to the euro’s strength, and said it was the main reason for a cut in the bank’s new 2018-19 inflation forecasts. He also indicated any winding down of its massive stimulus programme was likely to be slow.
It came as no surprise that Draghi cited the euro, which is up 14 percent this year against the dollar EUR= EUREER=ECBF, but his stress that the growth outlook was broadly unchanged allowed the euro to surge past $1.20.
“The verbal intervention that was potentially on the cards coming up to $1.20 wasn’t there,” said Neil Jones, head of hedge fund FX sakes at Mizuho. “The actual FX reference...was lukewarm at best.”
The single currency, which is up less than 5 percent on a trade-weighted basis EUREER=ECBF, rose as high as $1.2059 as Draghi spoke. It held most of its gains, last trading at $1.2027, up 0.9 percent on the day.
“This was classic Draghi at the press conference: very balanced regarding the economic outlook but very vague regarding the outlook for policy,” Martin Arnold, FX and macro strategist at ETF Securities in London.
European shares rose after the ECB reaffirmed its ultra-easy policy stance. The pan-European STOXX 600 index was last up 0.3 percent on the day, with the export-oriented German DAX .GDAXI up 0.7 percent.
Bond markets focused on the lack of a clear timetable for winding back the ECB’s programme of emergency bond buying, sending yields lower.
The scheme is due to run to the end of the year but a strong euro curbs inflation and could complicate any attempt to withdraw stimulus. Draghi said most decisions on the scheme would probably be taken next month.
Germany’s benchmark 10-year government bond yield fell to fractionally below 0.31 percent DE10YT=TWEB, its lowest since late June.
Italy’s 10-year bond yield tumbled 10.5 bps to 1.916 percent IT10YT=TWEB, also its lowest level since late June. That pushed the gap over top-rated German Bund yields to 161 bps -- its tightest in more than two weeks. Portuguese bond yields slid 13 bps to 2.72 percent IT10YT=TWEB, their biggest one-day fall since April.
Lower-rated southern euro zone countries have been among the main beneficiaries of ECB bond-buying, which has crushed borrowing costs across the bloc.
“There was no clear sign of tapering, so there is a bit of relief in bond markets,” said ABN AMRO senior fixed income strategist Kim Liu.
The euro initially surged after Draghi said the bank was keeping its growth and inflation forecasts broadly unchanged.
It fell back when he added that recent volatility in the exchange rate was a source of uncertainty and had contributed to a trimming of the 2018-19 inflation forecasts.
Its later recovery back above $1.20 helped push the dollar index to its weakest since January 2015. .DXY
“(Draghi) is firing bullets to try to slow the currency’s strength down as much as they can,” said Stephen Gallo, European head of FX strategy at BMO Financial Group in London.
“The drop in yields and tightening of spreads slowed it down and possibly they will be able to design a smooth exit. I don’t think they are comfortable at all on the level of the currency but they are trying to control the level of pain.”
Writing by Patrick Graham and Nigel Stephenson; Editing by Toby Chopra