June 6, 2012 / 12:22 PM / in 5 years

Euro gains in aftermath of ECB rate decision and Draghi

NEW YORK (Reuters) - The euro recovered to trade higher against the dollar in a volatile session on Wednesday after the European Central Bank left interest rates unchanged and investors shrugged off comments from ECB President Mario Draghi, who put the onus on European political leaders to resolve the debt crisis.

An illustration picture shows Euro banknotes in Brussels November 28, 2011. REUTERS/Thierry Roge

The ECB held its main interest rate at 1.0 percent on Wednesday, resisting international pressure to provide more support for the euro zone’s ailing economy.

But any dollar strength against the euro was likely capped after Atlanta Fed President Dennis Lockhart said on Wednesday, the Federal Reserve may need to consider additional monetary easing if a wobbly U.S. economy falters or Europe’s troubles generate a broader financial shock.

“The sell-off in the euro we saw post-press conference was short-lived and we’re bouncing around within the move,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. Draghi’s comments “were negative and the move was the right one but it ran out of steam.”

The euro was up 0.4 percent against the dollar at $1.2502, compared with 1.2495 before the ECB rate decision and well above a near two-year low of $1.2286 plumbed last Friday. Traders said any gains in the currency were likely to run into offers up to $1.2540.

Investors had been gearing up for the ECB to signal monetary stimulus to bolster the struggling economy and restore confidence in the euro zone.

With the euro and the region’s stock markets falling sharply in recent weeks given Spanish banking sector problems and the possibility of Greece leaving the euro zone, some investors were expecting the ECB to reassure investors by announcing fresh measures.

Draghi “rules out more (Long Term Refinancing Operations), and basically throws the onus back to politicians by saying it isn’t right for monetary policy to fill ”other actor’s lack of action“,” said Ron Simpson, director of FX research at Action Economics in Tampa, Florida. “It appears no more band-aids are forthcoming from the central bank, which has disappointed some euro bulls.”

The ECB’s decision comes after G7 finance ministers took no immediate steps to soothe fears over Europe’s debt problems on Tuesday but did discuss policy responses, including “progress towards financial and fiscal union in Europe,” the U.S. Treasury said.

Analysts said any move toward closer financial integration would boost the euro, but progress is likely to be very slow, leaving many traders looking to sell the euro on rallies.

“Euro/dollar is likely to squeeze higher but people will come in and sell rallies ... A one cent rally on the day would be a good opportunity to fade it,” said Paul Robson, currency strategist at RBS in London.

SPAIN WORRIES

Against the yen, the euro rose more than 1 percent to a session high of 99.30 yen, away from Friday’s trough, the lowest since December 2000, It was last up 0.9 percent at 98.90 yen.

Despite the bounce, the prospects for the euro looked bleak in the medium term as concerns are growing that Spain could resort to requesting international aid to help its ailing banking sector.

Germany and European Union officials are urgently exploring ways to rescue Spain’s debt-stricken banks although Madrid has not yet requested assistance and is resisting political conditions, EU sources said on Wednesday.

And, highlighting the risks to the banking sector from the sovereign debt turmoil, Moody’s Investors Service cut the credit ratings of several German banks on Wednesday.

Meanwhile, the higher-yielding Australian dollar, which suffered a drop of over 6 percent against the U.S. dollar last month, jumped 1.5 percent to $0.9885 after data showed Australia grew well above expectations in the first quarter.

The U.S. dollar rose by 0.5 percent against the safe-haven yen to 79.11 yen, after Japan warned it was ready to step in to curb the yen’s appreciation.

Reporting By Nick Olivari, Additional Reporting by Wanfeng Zhou, editing by Dave Zimmerman

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