Euro surges on bets of stimulus scaleback in EU

Fed chairman adds to momentum started by ECB chief on likely change in policy stance

LONDON • The euro hit a one-year high yesterday and government bond yields continued to rise, as bets grew that the European Central Bank (ECB) is readying to scale back its €2 trillion (S$3.2 trillion) 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 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.

Federal Reserve chief Janet Yellen added to the momentum as she noted asset valuations look rich and signalled the US economy can withstand higher interest rates.

The news gave a lively start to European trading, with euro briefly touching US$1.1379, the highest level since June last year. It is up almost 10 per cent this year. Against the Singdollar, it was trading 1.57.

US Treasury yields rose, after the biggest increase since January. Oil's winning streak ended as industry data showed US 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 Bank of Singapore's FX strategist Sim Moh Siong.

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 Mr Tareck Horchani, head of sales trading for Asia-Pacific for Saxo Bank Group in Singapore.

At the same time, the ECB probably would not want to see the euro rise too rapidly, he said.

"There could be a pushback 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 central bank 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.

REUTERS

A version of this article appeared in the print edition of The Straits Times on June 29, 2017, with the headline 'Euro surges on bets of stimulus scaleback in EU'. Print Edition | Subscribe