Euro fires up after banker’s speech

THE euro surged to its highest in over a week against the dollar yesterday after European Central Bank President Mario Draghi said factors weighing on inflation in the euro zone were mainly temporary and the Bank could look through them.

Speaking at the ECB’s annual policy forum at Sintra in Portugal, Draghi highlighted a recovering euro zone economy and said that deflationary forces had been replaced with inflationary ones, but added that stimulus in the form of the ECB’s monetary support was still needed.

That sounded to investors, however, like he was ready to give more ground on German demands that the ECB get on with starting to reduce the volume of extra euros it is feeding monthly into the economy.

The euro surged as Draghi spoke, rising as much as half a percent on the day to $1.1255, its highest level since June 14. It had earlier traded around the $1.1187 mark.

“Draghi’s comments were quite optimistic on the growth outlook, talking about a broadening recovery and even saying growth was above trend,” said Niels Christensen, currency strategist with Nordea bank in Copenhagen.

“While talking about inflation he said mainly temporary factors were slowing inflation at the moment, so he’s not too concerned about the fallback in at least headline inflation.”

Turn-around

Draghi’s comments contrasted with a dovish tone he took on Monday, saying that super low interest rates create jobs, foster growth and benefit borrowers, while rejecting calls to exit super easy monetary policy quickly.

The single currency’s strength pulled the dollar index – which measures the dollar against a basket of currencies – to an eight-day low of 96.973.

The greenback was also 0.3 percent lower against the Japanese currency at 111.560 yen, having earlier risen to a near five-week high of 112.075 in Asian trading.

Investors were awaiting speeches by Federal Reserve officials for signs on whether the central bank will stick to its guns and raise rates this year.

Fed Chair Janet Yellen addresses the British Academy in London at 1700 GMT (7pm), less than two hours after an address by Philadelphia Fed President Patrick Harker in the same city at 15h15 GMT (5.15pm).

Fed officials have signalled they will look through a slowdown in inflation and continue on their current trajectory of interest rate hikes.

Investors, however, are sceptical and market pricing shows only a 40 percent chance of a rise at the Fed’s December meeting.