Euro Rises to 2-Week High as Draghi Points to Improving Economy

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The euro rose to a two-week high after European Central Bank President Mario Draghi pointed to signs of improvement in the region’s economy.

The 19-nation currency strengthened against most major peers as Draghi said inflation would start accelerating later this year. While he was committed to seeing through the central bank’s quantitative-easing program, the ECB president said there was no need to expand its bond-purchase program. Germany’s 10-year bond yield increased to the highest this year, adding to the allure of euro-denominated assets.

“Higher yields make it more attractive for investors to hold euros,” said Chris Gaffney, president at EverBank World Markets in St. Louis. Draghi’s comments boosted the currency by indicating that “European quantitative easing is working and Europe is recovering.”

Gaffney said he expects the euro to fall in the longer term and sees the rally as a selling opportunity.

The euro advanced 1.1 percent to $1.1275 at 5 p.m. in New York, touching the highest since May 18. It climbed 1.2 percent to 140.07 yen, reaching the strongest since Jan. 9. The dollar was little changed at 124.25 yen.

Economic Outlook

“We expect the economic recovery to broaden, and domestic demand should be further supported by monetary policy measures,” Draghi said in a news conference after a meeting Wednesday in Frankfurt. “The recovery is on track.”

Since the ECB started its 1.1-trillion-euro ($1.2 trillion) QE program three months ago, inflation in the euro area has bottomed out. It remains far below the ECB’s goal of just below 2 percent as consumer prices rose 0.3 percent in May from a year earlier, a report Tuesday showed.

“The economic recovery in Europe is still fragile, it’s in the early stages, so having that support from the ECB, I think, is important,” said Katrina Dudley, a portfolio manager at Franklin Mutual Series, a unit of Franklin Templeton, which oversees more than $894 billion in assets.

The euro climbed 2.3 percent in the past week, the best performance among 10 developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. While signs of a European economic rebound helped the currency break a nine-month losing streak in April, it’s still down 18 percent from the start of July 2014.

Euro Positions

Investors are thinking “why would I really want to short the euro at this point,” Aurelija Augulyte, senior foreign-exchange strategist at Nordea Markets in Copenhagen, said by phone. Draghi’s comments, combined with improving economic data in Europe, suggest “the recovery will continue for the coming months.” A short position is a bet that an asset will decline in value.

The common currency reached a key target of $1.1250 in the short term, she said, and may extend gains to $1.1500 within several weeks.

“Some traders were short euros going into the ECB meeting because they thought that maybe Draghi would express some panic over higher bond yields, and he didn’t,” Thierry Albert Wizman, global interest rates and currencies strategist at Macquarie Capital USA Inc. in New York, said by phone. “And then people started to buy euros and that triggered a little bit of a short squeeze.”

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