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Euro strengthens after ECB dashes dovish hopes

London

THE euro jumped half a per cent on Thursday after the European Central Bank refrained from hinting at an interest rate cut, merely pushing back the timing of its first post-crisis rate hike.

The euro rose because investors had expected an even more dovish signal from the ECB and for the central bank to acknowledge weakness in economic growth.

"One of the more dovish outcomes we envisaged did not materialise. The governing council extended its forward guidance timing, but also under-delivered on the TLTRO front," TS securities told clients.

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The ECB said it would lend to banks at a rate just 10 basis points above its minus 0.4 per cent deposit rate in a new targeted longer-term refinancing operation, or TLTRO.

Money market futures are now pricing in a 45 per cent chance of a 10 basis point eurozone rate cut by the end of year versus 75 per cent before the ECB statement.

The euro has strengthened recently on the back of dollar weakness caused by rising bets on a US interest rate cut.

The single currency was 0.5 per cent higher at US$1.1273 after brushing a 11/2 month high of US$1.1307 earlier this week.

The ECB is trying to give the ailing eurozone a boost but has not yet signalled it will take more policy action later this year as an escalating global trade war unravels the benefits of years of monetary stimulus.

In a speech at 1430 GMT, ECB President Mario Draghi is expected to maintain guidance about the possibility of more stimulus. "Draghi would have to sound very concerned about the growth and inflation outlook to cause a reaction in the euro," said Antje Praefcke, an analyst at Commerzbank, in a note to clients.

Recession fears are sweeping across the world and central banks have in recent weeks cut rates in what could signal the start of a fresh global monetary easing cycle.

Japan's yen approached a five-month high on Thursday after a lack of progress in US-Mexico trade talks hurt risk sentiment and drove investors towards safe-haven currencies.

The Japanese yen has been the main beneficiary from a shift towards assets investors deem safer.

It rose as much as 0.3 per cent to 108.07 yen per dollar, close to its strongest level since Jan 10, after negotiations in Washington on Wednesday aimed at averting US tariffs on Mexican goods showed little sign of progress.

US President Donald Trump unexpectedly told Mexico last week to take a harder line on curbing illegal immigration or face 5 per cent tariffs on all its exports to the United States.

The Mexican peso, already saddled with trade concerns, took a hit after credit ratings agency Fitch downgraded its sovereign debt rating on Wednesday by a notch from BBB+ to BBB, just two notches above junk status. REUTERS