Euro rebounds to three-week high

London

THE euro climbed to a three-week high on Thursday as investors raised their bets that the European Central Bank (ECB) will next week signal a winding down of its vast bond-buying programme by the end of this year.

The central bank's chief economist Peter Praet, a close ally of president Mario Draghi, said on Wednesday that the ECB would debate at its policy meeting next week whether to end bond purchases later this year.

Jens Weidmann, the head of Germany's central bank, said that expectations that the ECB would taper its bond-buying programme by the end of this year were plausible while his Dutch counterpart, Klaas Knot, said that there was no reason to continue a quantitative easing programme.

The comments drove the euro to US$1.1838, up half a per cent on the day and its highest since May 17.

Some analysts have taken the comments to suggest that a decision is coming at the June 14 meeting but others saw it as the starting gun in a debate that will likely culminate in a decision in July.

Petr Krpata, currencies strategist at ING, said that the most "realistically bullish" case was for the ECB to signal a one-quarter extension of the bond buying to end-December.

"If they say only one more quarter, that's the biggest upside potential for the euro," he said, adding that he was less bullish and expected the ECB to make the unwinding more open-ended and conditional on economic news.

He said that the euro's strength was limited given concerns about a trade war that could hit big eurozone exporters, and the possibility of a more hawkish Federal Reserve when it meets next week and is expected to raise interest rates for the second time this year.

Many market players were surprised by the flurry of ECB comments as they had thought that uncertainty caused by a political crisis in Italy would stay policymakers' hands.

Eurozone inflation will also need to stay close to the ECB's target for several months before policy is tightened, analysts said.

"Our economists remain highly sceptical about the development of (core) inflation in the eurozone," Commerzbank analysts wrote, describing some "normalisation fantasies" as "too high-flying".

In emerging markets, the Turkish lira was the big mover of the day. The lira surged more than 3 per cent to below 4.47 lira against the US dollar after the central bank hiked the benchmark interest rate by 125 basis points, more than expected. REUTERS