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Euro falls with 'lowflation' in sights

Thursday, April 03 16:00:35

The euro dropped after the European Central Bank kept interest rates on hold and pledged to use unconventional measures if needed to battle low inflation in the euro zone.

The currency shared by 18 nations dipped as low as $1.3736 during a news conference by ECB President Mario Draghi and later declined as low as $1.3711.

The euro last stood off 0.40 percent against the dollar at $1.3716 and was down 0.14 percent against the British pound and 0.25 percent against the Japanese yen.

"The (ECB's) Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation," Draghi told the news conference.

Euro zone annual inflation ticked down to 0.5 percent in March, its lowest since the economy was deep in recession in 2009, and its sixth month in what Draghi has described as "the danger zone" below 1 percent.

"The ECB is being slightly more dovish than the market expected," said Kathy Lien, managing director at BK Asset Management in New York. "The main takeaway is that the council is considering unusual techniques, and that's negative for euro/dollar."

The euro's decline fed a rally in the dollar, with the U.S. dollar index up 0.27 percent to 80.418 in early New York trading.

The dollar was up against the yen at 103.95 yen after touching a high of 104.06, a level last seen on Jan. 23.

Unlike in January and February, there had been few if any mainstream voices in the market predicting action from the ECB in the form of a cut in its official interest rates.

The main move of the past two weeks on major currency markets has been the dollar's steady march higher against the yen, awakening hopes that the greenback may finally be set to deliver on the break higher predicted by many banks in January.

The dollar has gained almost 3 percent against the yen since U.S. Federal Reserve chief Janet Yellen told markets on March 19 that the Fed might raise interest rates next spring. U.S. jobs data on Friday may be the decisive factor for any further gains.

"There is a lot of resistance (to more dollar gains) around 104 yen and we may not break that today," said a dealer with one bank in London. "The key to any move higher will be non-farm payrolls tomorrow."