Dollar hits three-year euro low as European Central Bank warns of forex volatility

Posted January 28, 2018

ECB President Mario Draghi could use the press conference that follows the meeting to stress that the euro appreciation has been in excess of what is warranted by fundamentals, or to push back against rate hike expectations, the analysts said.

The euro at one point zoomed up more than 1% to a 3-year high of over USD1.25 after Draghi told the press conference that the bank was confident inflation was edging its way closer to its goal.

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. Steven Mnuchin, the US Treasury Secretary has changed the US Dollar policy and now sees a weaker Dollar as the way to move the US economy forward.

This is because a stronger exchange rate is expected to hurt exports and company earnings. But rapid economic growth and the likely end of the bond buys later this year justify some currency strength.

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The 2019 growth outlook was lifted to 1.9 percent from 1.7 percent.

But predictions for tighter European Central Bank policy are adding to pressure on the currency and raising market bets for a rate hike as early as December, a move seen as premature even by the most hawkish of policymakers.

The purchases, already twice reduced, are set to run until the end of September and investors are betting on their end in the fourth quarter.

The survey also confirmed Draghi's confidence in growth as the GDP projection for this year was raised to 2.3 percent from 1.9 percent three months ago.

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"The apparent lack of concern over the euro's recent ascent by European Central Bank chief Draghi provided the green light for a break of $1.25", said NFS Macro analyst Nick Stamenkovic.

Part of his holding pattern approach, Draghi also kept the bank's guidance unchanged, maintaining a promise to continue asset buys until a sustained rebound in inflation, even after policymakers agreed in December to begin work in early 2018 to draft a new guidance.

But that progress was stopped later in the day as Trump sought to play down the speech by the United States treasury secretary by saying that the dollar was bound to get stronger due to the strong economic data.

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