ECB comments suppress euro, US dollar perks up

London

THE euro fell on Wednesday - under pressure after a European Central Bank (ECB) official said the bank was monitoring the currency closely - while the US dollar perked up ahead of the Federal Reserve's first meeting of the year.

ECB governing council member Klaas Knot said the central bank has room to cut its deposit rate further, should it be necessary to improve financing conditions and reach its inflation target.

His comment constituted the most explicit hint to date from an ECB policymaker about the possibility of a rate cut to stem a rally in the euro - a move that seemed highly unlikely until recently.

The single currency is up almost 15 per cent since March last year, against a greenback that most analysts expect to decline further. Mr Knot's comments came as the euro, already weaker on the day, extended losses against the greenback. It last traded 0.3 per cent lower at US$1.2120.

Analysts said that reports on Tuesday the ECB was studying whether differences with the Fed's policy in the US were boosting the euro - part of a wider review of financing conditions - would not have a material effect on the currency.

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It is "probably one of those headlines where it's a buy on the dip moment in euro/dollar here," said Jordan Rochester, FX strategist at Nomura in a note to clients. He remains long on the pair with a target of US$1.25 by the end of March.

Alexandre Dolci, G-10 FX strategist at BBVA, has a similar outlook: "Despite the heavy positioning, we continue to favour buying euro/dollar on dips as we see the pair steadying in a US$1.20-US$1.25 range."

ECB president Christine Lagarde has repeatedly said the central bank is carefully monitoring the single currency's exchange rate.

"We suspect they might find that higher inflation is more credible in the US and that euro/dollar spot is closer related to the global manufacturing sector (which is doing well), not European services and maybe, that expectations are elevated in terms of Europe's comeback," said Lars Sparresø Merklin, senior analyst at Danske Bank. "Either way, this adds to a growing number of countries who appear uncomfortable with US dollar weakness."

The greenback reversed early declines in Asia to trade up 0.3 per cent at 90.393 as markets waited for comments from Fed chair Jerome Powell. REUTERS