LONDON (REUTERS, BLOOMBERG) - The euro hit a 1-year high yesterday Wednesday and government bond yields continued to rise, as bets grew that the European Central Bank is readying to scale back its 2-trillion-euro stimulus programme.
ECB chief Mario Draghi, at a conference in Portugal on Tuesday, had hinted that the central bank could adjust its policy tools of sub-zero interest rates and massive bond purchases as economic prospects improve in Europe.
But any change in the ECB's stance should be gradual as "considerable" monetary support is still needed and the rebound in inflation will also depend on favourable global financing conditions, he added.
US Fed chief Janet Yellen added to the momentum as she noted asset valuations look rich and signaled the US economy can withstand higher interest rates.
The news gave a lively start to European trading, with euro rising 0.2 per cent to US$1.1358 as of 10:02 a.m. in London, after briefly touching US$1.1379, the highest level since June 2016. Euro is now up almost 10 per cent this year. Against the Singdollar, it was trading 1.57.
US Treasury yields rose again after the biggest increase since January. Oil's winning streak ended as industry data showed American stockpiles rose.
Mr Draghi's comments were taken as pointing to the possibility that the ECB may announce a tapering of its massive bond purchases in coming months, possibly as early as September, said Sim Moh Siong, FX strategist for Bank of Singapore.
Traders said the euro could add to its gains in the near term. "With the hawkish tone of Mr Draghi, we should see European rates moving higher, especially on the 10-year part of the curve, and I think the euro has more room to move higher," said Tareck Horchani, head of sales trading for Asia-Pacific for Saxo Bank Group in Singapore.
At the same time, the ECB probably won't want to see the euro rise too rapidly, he said.
"There could be a push-back if the euro is perceived to have strengthened in a manner that is too fast for the ECB's liking," Mr Sim said, adding that the ECB might highlight the risk that the euro's rise could exert downside pressure on inflation.
The dollar remained on the defensive after US Senate Republican leaders postponed a vote on a healthcare overhaul on Tuesday, as they faced resistance from party members.