ECB president’s comments sink euro after two days of gains

Comments from ECB president Mario Draghi sent the euro down half a percent to less than $1.07 on Friday after two days of gains which dealers now put down to a trimming of trading positions by a handful of major investors.

Most major banks have stuck firmly to the view that the dollar will rise towards parity with the single currency in the months ahead as the US Federal Reserve begins to lift interest rates while other central banks do the reverse.

Yet progress since a very robust batch of US jobs data at the start of November has been tougher. The greenback fell last week against the basket of currencies used to measure its broader strength and is up just 0.3 per cent this week.

Draghi said the ECB would do what it had to do to raise inflation as fast as possible and pointed to the benefits of a cut in deposit rates to aid an expansion of its quantitative easing programme of bond-buying.

“With the ECB easing policy, I would be very surprised if the euro didn’t fall through parity,” Mark Burgess, chief investment officer at Columbia Threadneedle Investments, told Reuters’ Investment Summit on Friday.

By 1248 GMT, the dollar traded at $1.0676 per euro. It was flat at 122.89 yen and 0.4 per cent higher against the basket at 99.336.

“It does seem like the big euro bounce two days ago was one of the big institutions liquidating positions,” said a senior dealer at one large international bank in London.

“There has been some of that sort of trade in general this week and we may now see the trend (for a stronger dollar) reestablish itself.”

The euro also fell against sterling and the Swiss franc. Speculation among market participants of intervention by the Swiss National Bank has intensified this week, weakening the Swiss currency. It rose a quarter percent against the euro on Friday while falling similarly against the dollar. .

In general, there are some more questionmarks over the dollar’s ability to rise in the sort of sustained fashion seen at the end of last year and start of this, even if as yet few analysts are reversing forecasts for more gains.

For the short term, the options market has substantial barriers in place around $1.06 preventing the euro from falling further, while many investors may simply not have the appetite to put yet more money on the table just as the year is closing.

Further forward are questions of whether the Fed will be so bullish on dollar interest rates if the dollar gains another 10 per cent, and the history that shows the start of a cycle of rate rises tends to weaken rather than strengthen the currency.

“It’s hard not to say that you’re bullish on the US dollar,” another senior investment manager, Barings Asset Management’s Ken Lambden, told the Reuters summit this week.

“But we don’t think US growth is as strong as it looks. So there is a case to say you could get some strength out of the euro on the back of an improving economic performance next year.”