Euro rebounds as Draghi quashes easing expectations

NEW YORK: The euro rallied on Thursday, on track for its largest one-day gain in two months against the dollar, as European Central Bank President Mario Draghi gave no indication the bank would cut interest rates further in the euro zone.

The ECB, which kept interest rates steady, had been expected to lower its inflation and growth forecasts, giving Draghi room to cut rates and support recession-hit economies in the coming months. The bank did lower its growth forecast for the currency bloc for 2013, but Draghi said he expects economic activity to gradually recover given firming global demand.

He also said inflation expectations "remain firmly anchored," in line with the ECB's aim of maintaining inflation rates below but close to 2 percent over the medium term. That should allow the ECB's monetary policy stance to stay loose.

The ECB chief also said people have underestimated the political commitment to the euro at their own cost.

"Draghi played cheerleader, transmitting a bit of hope to the euro FX rate but leaving no room for an added ECB boost to the business cycle," said Dan Dorrow, head of research, at FX broker Faros Trading in Stamford, Connecticut.

But he added that despite the euro's appreciation, he viewed Thursday's ECB comments including the growth and inflation forecasts as negative for the euro zone's shared currency in the medium term.

"Growth differentials will increasingly matter for FX rates in a global environment with receding tail risks," said Dorrow. "The ECB is the most behind the curve among G4 central banks (US, UK, euro zone, and Japan) in terms of providing policy support for the business cycle -- despite the fact that the euro zone's growth outlook is the worst among the G4 economies."

The euro was up 1.1 percent on the day at $1.3105. The session peak of $1.3116 marked a five-day high. Some US$5.2 billion in euros changed hands using Reuters Dealing..

Healthy demand at a Spanish debt auction also eased some investor concerns about the euro zone. Spain sold 5 billion euros of bonds, hitting the top end of its targeted amount at reduced borrowing costs despite political uncertainty in Italy.

Marc Principato, director of SMB Forex Trading And Education in New York, said the single currency, after breaching minor resistance at $1.3050, faced significant challenges between $1.3250 and $1.3300 in the coming week.

Most analysts say even if borrowing costs for highly indebted euro zone countries like Spain and Italy do not rise, on a more fundamental basis the struggling euro zone economy will need a more accommodative monetary policy stance along with a weaker currency to boost growth.

Against the yen, the euro surged nearly 2.1 percent to 124.57 yen, its highest in more than a week. The euro was also on pace for its best one-day performance in a month and a half versus the yen.