The euro fell against the dollar on Thursday, after the European Central Bank’s (ECB) President Jean-Claude Trichet comments showed less hawkish tone than the markets had expected.
EUR/USD tumbled to a session low of 1.4749, down 0.9 percent from a peak of 1.4899.
Trichet in his opening remarks at the press conference did not use the phrase strong vigilance, dampening speculations over interest rate hike as early as next month.
“We continue to see upward pressure on overall inflation, mainly owing to energy and commodity prices. While the monetary analysis indicates that the underlying pace of monetary expansion is still moderate, monetary liquidity remains ample and may facilitate the accommodation of price pressures,” Trichet said.
Moreover, it is essential that recent price developments do not give rise to broad-based inflationary pressures, Trichet added.
In the past ECB frequently used the phrase strong vigilance, before it raised the interest rates by 25 points to 1.25 percent in April, its first rate hike since July 2008. ECB left its benchmark interest rates unchanged at 1.25 pct in line with market expectations on Thursday.
“Trichet's press conference has two-sided risk to it, dependent on whether Trichet signals an imminent rate hike at next month's meeting. Failure to do so could feed through into a deeper market correction, allowing a USD relief rally to gain momentum,” said a note from BNY Mellon.
With interest rates across the entire maturity spectrum remaining low and the monetary policy stance still accommodative, we will continue to monitor very closely all developments with respect to upside risks to price stability, Trichet said.
The European Central Bank (ECB) should not rush to hike interest rates and allow the banking system in the eurozone to repair itself without the hurting the region’s recovery, said the International Monetary Fund (IMF) last month.
“In the euro area, remaining financial fragilities could hold back growth, justifying a slower pace of normalization of interest rates,” IMF said. “Moreover, the ECB’s extraordinary measures will need to be removed only gradually as systemic uncertainty recedes.”
Meanwhile, a report from the US labor department on Thursday showed that initial jobless claims last week rose sharply to 474,000 from 429,000 in the previous week, hitting an 8-month high.
“The dominance of interest rates is driving USD weakness and likely continuing absence of a positive rate dynamic near-term leaves us revising our near-term USD forecast lower. However, the market is already heavily short USD and may be putting too much weight on the notion that USD is in structural decline, when in reality most of the decline is conventional and cyclical,” said a note from RBC Capital Markets on Wednesday.