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Euro rallies on talks of ECB ending stimulus programme


THE euro rose to a 10-day high on Wednesday after officials said the European Central Bank (ECB) could wind down its stimulus programme by end-2018 and that inflation was rising back to its target.

Having revived growth with an unprecedented 2.55 trillion euro (S$4 trillion) bond purchase scheme, the ECB has been debating whether to end the purchases this year as the threat of deflation has passed and the bloc is on its best growth run in a decade.

Many traders expected the central bank to remain cautious at its June 14 policy meeting given the uncertainty caused by a political crisis in Italy.

But ECB chief economist Peter Praet said on Wednesday the central bank would next week debate whether to gradually unwind bond purchases.

Germany's central bank head said market expectations for an end to bond-buying this year were plausible.

The comments pushed the euro up half a per cent to a 10-day high of US$1.1780 and the currency also hit an eight-day high of US$1.1640 versus the safe haven Swiss franc.

As well as boosting the euro, analysts said the comments would introduce heightened volatility in the options markets over the ECB meeting.

"Markets have already factored in a US rate hike; that means the ECB is the most likely trigger for heightened volatility and I'm expecting to see that as we head into the meeting," said Ulrich Leuchtmann, head of FX strategy at Commerzbank.

"What's important isn't if they (the ECB) announce the end of quantitative easing now or in July, but whether this will really constitute the end of unconventional monetary policy and a reason therefore to expect higher interest rates," he said.

The euro has gained about 0.8 per cent so far this week after hitting a 10-month low of US$1.1510 on May 29.

The euro's rise put pressure on the US dollar. The index fell 0.3 per cent to a 10-day low of 93.604.

The ECB comments followed a speech by Italy's new Prime Minister Giuseppe Conte, whose promise of radical change had a mixed impact on the euro. While his reassurance that leaving the euro was not on his agenda helped to underpin the common currency, the new government's tax cuts and higher welfare spending plan lifted Italian bond yields, undermining investor confidence.

"The market will start to focus on the ECB from now on. Politics in Italy and Spain will play second fiddle as we now have new governments in both countries," said Kazushige Kaida, head of foreign exchange at State Street Bank. REUTERS

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