Euro rises as ECB's Draghi surprises traders

London

THE euro rose as European Central Bank (ECB) president Mario Draghi expressed optimism about inflation and the economy, surprising some investors who had expected him to do more to talk down the single currency.

Speaking in Frankfurt after the ECB kept its main interest rates on hold, he predicted inflation would pick up in the second half of this year and improve through 2017 to 2018, while pointing to an improvement in eurozone financing conditions.

"The gain in the euro was a reaction to the ECB's decision to keep rates on hold and the fact that Draghi has so far refrained from talking about the euro," said Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA in Milan, the most accurate forecaster of the euro-dollar rate in Bloomberg's latest rankings. "He has changed his approach on foreign exchange. Now it's time for credit easing, not FX easing."

The shared currency reached a session high of US$1.1398, a 0.9 per cent gain on the day. It soon pared its gains and was up 0.4 per cent at US$1.1338 as of 2:40pm London time. The euro was also supported by worse-than-forecast outlook data from the US.

"The euro may be higher just because Draghi's not trying intentionally to push it down," Athanasios Vamvakidis, London-based head of Group-of-10 currency strategy at Bank of America Corp. "If this is the reason, it will not be a sustained move."

The euro is up about 3 per cent since the last ECB decision on March 10, even though officials at that gathering cut both the main refinancing rate and the deposit rate, and expanded bond purchases under quantitative easing.

Its resilience is partly because the Federal Reserve has signalled it will take a gradual approach to policy tightening in the US.

The ECB also announced on Thursday that it will also keep its asset-purchase programme at 80 billion euros (S$122 billion) a month.

"We believe Draghi's language should continue to be dovish and focus on the credit-easing policy rather than the currency," said Reine Bitar, London-based macro strategist at Invesco Asset Management Ltd. BLOOMBERG

READ MORE: ECB stimulus working, maintains Draghi