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Euro dips after Draghi comments

Thursday, April 24 12:46:50

The euro gave up gains against the dollar today, 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. (Reuters)