Euro at three-year high against dollar despite Draghi’s reassurances

THE euro has rocketed to a three-year high against the dollar despite efforts by the European Central Bank to hold back the onslaught, making it even harder for the eurozone to escape its “low-flation” trap.

The exchange rate smashed through technical resistance, reaching $1.1652 after traders disregarded a string of dovish comments by Mario Draghi, the ECB’S president, yesterday.

It has wiped out all the currency effects since the launch of quantitative easing – normally a ruse to weaken exchange rates – rising almost 10pc in trade-weighted terms since late 2014.

News Robert Mueller, the US special prosecutor, is expanding his probe into the business empire of Donald Trump compounded the dollar’s woes. Fears of paralysis in Washington are causing investors to wind down bets on tax reform and infrastructure spending.

Mr Draghi rowed back from his June talk of a “reflation” revival in Europe, insisting instead that monetary stimulus will be needed for a very long time and bond tapering will be glacially slow. “Let me be clear, inflation is not where we want it to be, and where it should be,” he said.

The bank restated that it “stands ready” to step up its €60bn (£54bn) programme of bond purchases each month if need be. “This is a clear sign that the ECB does not want to pour more oil on the small taper tantrum fire seen in financial markets over the last few weeks,” said Carsten Brzeski from ING.

Yet Mr Draghi’s soothing words failed to do the trick. Currency markets were watching to see whether he would flag the strong euro as a rising risk. “He absolutely ducked it. When they saw that, everybody piled into the euro,” said one trader.

Hans Redeker, chief currency strategist at Morgan Stanley, said the euro could go much higher if the eurozone’s political leaders agree on a “grand bargain” to rebuild monetary union on better foundations.

Purchasing power analysis suggests that the equilibrium level for the eurozone as a whole is around $1.35 (and $1.54 for Germany). “We may have to think about that number if the German election in September really does lead to deeper EU political integration,” he said. The ECB appears to have been rattled by a spike in borrowing costs over the last three weeks. Yields on 10-year German Bunds have jumped 30 basis points to 0.54pc.

The announcement on bond tapering is likely to come in September or October, with purchases cut to €40bn a month in January and then phased out by the middle of 2018. By then the ECB will have exhausted the stock of German, Irish, Portuguese, Finnish and Spanish bonds that it can buy under current rules.