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Euro advances after ECB's Lagarde says exchange rate not being targeted

NEW YORK (Reuters) - The euro rose to a one-week high against the dollar on Thursday, after European Central Bank President Christine Lagarde said that while the ECB is watching the exchange rate, it is not a monetary policy tool.

FILE PHOTO: A man is seen in front of a sheet of five Euro notes at the opening of the new Central Bank of Ireland offices in Dublin, Ireland April 24, 2017. REUTERS/Clodagh Kilcoyne

Her comment suggested the ECB was unlikely to undertake measures to weaken the euro despite its recent gains, giving traders motivation to take the single euro zone currency higher.

As expected, the ECB held interest rates steady on Thursday.

The euro rose as high as $1.1917 EUR=EBS, a one-week peak, and was last up 0.2% at $1.1825. The euro's high this year is $1.2014, with the currency surging roughly 6% so far this year.

But a strong euro tends to hurt an export-dependent economy like the euro zone, raising concerns from some ECB officials such as chief economist Philip Lane, who said the exchange rate mattered to monetary policy.

“We do not target the exchange rate,” Lagarde said during a news conference, adding that the central bank was monitoring it.

Just as Lagarde was starting her press conference, Bloomberg news came out with a report, citing ECB sources, saying there was no need to overreact to the euro’s gains. Traders said the Bloomberg report caused a spike in the euro.

“Markets know there is very little that the ECB can actually do to weaken the currency. Rates are almost as low as they can possibly go and the various asset purchase and lending program are already sizable,” said Seema Shah, chief strategist at Principal Global Investors.

“What’s more, the euro is strengthening for all the right reasons: improving growth, relatively contained COVID infection rates, and positive developments in the fiscal stimulus region,” she added.

The ECB raised its economic outlook for this year, although projections for next year and 2022 remained little changed. The new forecast predicts a contraction of 8.0% in 2020, compared with its previous estimate of an 8.7% fall.

In afternoon trading, the dollar index slipped 0.1% to 93.345 =USD, after hitting a four-week high the previous session.

The dollar slipped after data showed U.S. initial jobless claims totaled a seasonally adjusted 884,000 for the week ended Sept. 5, matching the number of applications received the prior week. Economists polled by Reuters had forecast 846,000 jobless claims applications.

U.S. producer prices were better than expected though, with gains of 0.3% for the headline and 0.4% for the core figure.

Against the yen, the dollar slipped 0.1% at 106.09 yen JPY=EBS.

Sterling dropped to a seven-week low against the dollar at $1.2777 GBP=D3, weighed down by fears the UK-EU trade negotiations may fall apart. It was last down 1.7% at $1.2783.[GBP/]

The pound also slid to a more than five-month trough versus the euro, which rose to 92.70 pence EURGBP=D3.

Reporting by Gertrude Chavez-Dreyfuss; Editing by David Gregorio and Leslie Adler

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