Euro Drops to 7-Week Low as Draghi Reiterates Commitment to QE

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The euro fell to a seven-week low against the dollar as European Central Bank President Mario Draghi reiterated his commitment to providing unprecedented stimulus to the euro area.

The shared currency weakened versus all but one of its 16 major peers after Draghi said that the central bank increased emergency liquidity assistance to Greece on Thursday. Draghi said at a press conference that recent market uncertainty hasn’t changed the region’s economic outlook and that stimulus measures, including a 1.1 trillion-euro ($1.2 trillion) bond-buying program, will push inflation back toward target.

“The ECB’s still stuck in quantitative easing,” while the Federal Reserve edges closer to raising interest rates, John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark, said by phone. That’s “helping the euro lower and the dollar higher.”

The euro dropped 0.7 percent to $1.0875 as of 5 p.m. New York time and touched $1.0856, the lowest since May 27. It weakened 0.4 percent to 135.01 yen.

Federal Reserve Chair Janet Yellen reiterated in testimony to a U.S. Senate committee today that she expects the central bank to begin raising interest rates this year and to proceed in a gradual manner, echoing comments she made to lawmakers Wednesday.

The divergence in monetary policy may depress the common currency to parity with the dollar in four to six months, Hardy said.

Inflation Outlook

“The market was already expecting a dovish tone” from the ECB, said Athanasios Vamvakidis, head of Group-of-10 currency strategy at Bank of America Merrill Lynch in London. The increased aid to Greece “is not enough to offset how the market wants to trade the euro at this point. And Draghi did mention earlier the ECB is willing to do more if needed in terms of policy easing. That’s euro-negative.”

The ECB started its quantitative-easing program in March to boost growth and consumer prices. A gauge of the outlook for inflation dropped for a third day amid a decline in oil prices.

The Frankfurt-based ECB kept its refinancing rate at a record-low 0.05 percent and the deposit rate at minus 0.2 percent, as predicted by economists in separate Bloomberg surveys. Draghi said in the press conference in Frankfurt that implementation of QE is proceeding “smoothly.”

In a midnight vote in Athens, Greek lawmakers approved new austerity measures that are a precondition for a bailout that keeps the country in the euro bloc. Since then, euro-area finance ministers agreed in principle to extend a 7 billion-euro bridge loan to Greece, according to an official familiar with the decision.

The ECB raised its ELA to Greek banks by 900 million euros on the assumption that Greece will remain part of the currency union. The new bridge loan restored the conditions needed to unfreeze the support from the central bank, Draghi said.

“The ELA increase was very small and that doesn’t lift market sentiment for the euro,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt.

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