Euro soars after Draghi delivers upbeat assessment
The euro briefly shot past $1.25 to a new three-year high yesterday after European Central Bank President Mario Draghi said the central bank did not target foreign exchange rates when asked about the strength of the single currency.
An upbeat tone on the economy and the medium-term outlook for inflation meanwhile sent bond yields in Germany, the bloc's biggest economy, to their highest level in around six months. Speaking at a press conference following an ECB meeting earlier yesterday, Mr Draghi said that recent currency volatility was a source of uncertainty, but he did not express outright unease with the euro's strength. And he said there was little chance interest rates would be hiked this year.
The euro surged to $1.2538, its highest level since December 2014, before slipping to trade at $1.2489, up 0.6pc. The single currency was flat before Mr Draghi started speaking.
He also said that pumping money into the Eurozone economy was still necessary in order to boost inflation.
With the bloc's economy growing faster than expected, investors have been speculating that the ECB could abruptly stop its asset purchases in September, as advocated by Estonia's central bank governor, Ardo Hansson.
But Mr Draghi was clear that stimulus remains needed, with inflation being subdued and only seen gradually rising over the medium term.
"An ample degree of monetary stimulus remains necessary for underlying inflationary pressures to continue to build up," he said. The stimulus would come from asset purchases, asset holding, reinvestment and forward guidance that interest rates will remain low, Mr Draghi said.
With the euro touching a series of three-year highs in recent days, some traders were expecting Mr Draghi to talk down the single currency, given that its rise could squeeze the competitiveness of Eurozone exporters down the line and pull down inflation.
On a trade-weighted basis, the euro's rise is far less marked, however. "Euro (has broken) higher on no verbal intervention," said Mizuho's head of hedge fund FX sales, Neil Jones.