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Forex - Euro dives on dovish ECB comments
(Updates with full report) LONDON (Thomson Financial) - The euro fell sharply on dovish comments from a euro zone central banker, giving the US dollar some support to counter its recent weakness based on expectations for aggressive Fed rate cuts. Dovish comments in an interview with Yves Mersch, Luxembourg central bank chief and member of the European Central Bank, suggested the European Central Bank may change tack and start considering rate cuts -- in stark contrast with its previously transmitted view. Mersch said in an interview that 'there are factors that mitigate inflation risks' and suggested the ECB could 'look through' temporary high levels of inflation to the growth risks beyond. The downside risks to the euro zone economy have increased, he signalled. Mersch's comments prompted a dive in the euro as markets digested this prospect, before the single currency stabilised at much lower levels. However, Michael Cartine at Thomson IFR Markets said investors should not expect the ECB to act on this more dovish tone in the immediate future. 'Make no mistake, without much more trauma in European markets and the European economy, rate cuts are still a fair way off,' he said. '(The comments) are quite likely intentionally designed to take some pressure off the currency,' he added. The ECB has held interest rates at 4.00 pct since June last year and, before today, had been at pains to insist its primary concern was inflation rather than slowing growth, meaning rate cuts were out of the question. Ian Stannard at BNP Paribas said the euro will likely suffer a great deal from the dovish rhetoric. 'We're now seeing fairly broad-based euro weakness coming in, and I'd expect further euro losses,' he said. The dollar benefited across the board on this news, pushed higher by its gains against the euro. 'The worries over growth from the ECB's Mersch have seen euro/dollar tumble, providing a broad boost for the dollar overall,' said Rhonda Staskow at IFR Markets. The US currency has been under considerable pressure on expectations the US Federal Reserve will cut interest rates aggressively this month, possibly by as much as 75 basis points and potentially acting before its end-of-month scheduled meeting. This view was little changed by December inflation data today, which showed core CPI continuing to rise, or industrial production figures that showed the manufacturing sector suffering despite a weak currency. 'Today's (inflation) report is not nearly damaging enough to dampen the wave of enthusiasm for a 50-basis-point reduction at the end of this month,' said Kenneth Beauchemin, economist at Global Insight. London 1705 GMT London 1315 GMT US dollar yen 106.41 up from 106.31 sfr 1.1010 up from 1.0909 Euro usd 1.4645 down from 1.4797 yen 157.26 down from 157.31 sfr 1.6123 down from 1.6145 stg 0.7460 down from 0.7538 Sterling usd 1.9622 down from 1.9624 yen 210.72 up from 208.58 sfr 2.1601 up from 2.1400 Australian dollar usd 0.8788 down from 0.8799 stg 0.4476 down from 0.4484 yen 94.41 up from 93.57 [email][email protected][/email] abr/ejp/abr/ajb/abr/ajb COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.
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