The European Central Bank expectedly kept the key interest rates unchanged

Chelsea West
January 28, 2018

European Central Bank President Mario Draghi hit back on Thursday at the Trump White House for talking down the United States dollar, warning of the risks to the ECB's inflation outlook as a result of a surge in the euro.

U.S. Treasury Secretary Steve Mnuchin said he welcomed a weak dollar, arguing that it was good for U.S. trade, and Commerce Secretary Wilbur Ross said "U.S. troops are now coming to the ramparts" in global trade wars.

The euro jumped about 1 percent to $1.2536, its highest since mid-December 2014, before paring gains to trade up 0.12 percent against the dollar.

As widely expected, the ECB kept interest rates and guidance unchanged at its policy meeting, with investors focusing on comments from ECB President Mario Draghi in a subsequent press conference.

The pace of growth in lending to businesses in the eurozone slowed in December, European Central Bank data showed Friday, in a mild setback for the Frankfurt institution.

The euro has risen by around 5% against the dollar since the beginning of the year, having already climbed 14% against the dollar during 2017.

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Wanting to keep all options on the table, Draghi is likely to signal a concern about the rapid rise in the currency but will maintain that it is not a policy target, hoping to strike a balanced message until policymakers are ready to unveil their blueprint for winding down stimulus, economists said. This was not enough dovishness for the traders and they began to push the euro higher as it rocketed through the 1.25 region and it seemed that it would only be a matter of time before it went towards 1.26.

Inflation is also years away from rising back to the ECB's target of 2 percent, so Draghi can hardly afford any big currency swings.

The 2019 growth outlook was lifted to 1.9 percent from 1.7 percent.

"The apparent lack of concern over the euro's recent ascent by European Central Bank chief Draghi provided the green light for a break of $1.25", said NFS Macro analyst Nick Stamenkovic.

Consequently, euro zone bond yields - which move inversely to price - dropped 1-3 basis points across the board on Thursday.

"The euro's strong performance at the start of 2018 has been aided by upbeat" economic data, said Stamenkovic at NFS Macro.

Other reports by TheSundaySentinel

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