January 25, 2018 / 3:08 PM / a month ago

UPDATE 2-Euro soars as Draghi gives bulls green light, bond yields hit 6-month high

* Euro jumps above $1.25

* German, French 10-year bond yields at 6-month highs

* Draghi says ECB doesn’t target fx rates (Updates prices, adds charts )

By Tommy Wilkes and Dhara Ranasinghe

LONDON, Jan 25 (Reuters) - The euro briefly shot past $1.25 to a three-year high on Thursday, after European Central Bank President Mario Draghi said the central bank did not target foreign exchange rates when asked about the strength of the single currency.

An upbeat tone on the economy and the medium-term outlook for inflation helped send bond yields in Germany, the bloc’s biggest economy, to their highest level in around six months.

Speaking at a press conference following an ECB meeting, Draghi said that recent currency volatility was a source of uncertainty but he did not express outright unease with the euro’s strength.

The euro surged to $1.2538, its highest level since December 2014, before slipping back to trade at $1.2498, up 0.7 percent. The single currency was flat before Draghi started speaking.

With the euro touching a series of 3-year highs in recent days, some traders were expecting Draghi to talk down the single currency, given its rise could squeeze the competitiveness of euro zone exporters down the line and pull down inflation.

On a trade-weighted basis, the euro’s rise is far less marked, however.

“Euro (has broken) higher on no verbal intervention,” said Mizuho’s head of hedge fund FX sales, Neil Jones. “We were looking for it but we didn’t get it. It appears Mnuchin’s comments were more verbal intervention than Draghi‘s.”

Draghi said the ECB might have to review strategy if U.S. comments on a weak dollar lead to a change in monetary conditions.

U.S. Treasury Secretary Steven Mnuchin said on Wednesday that he welcomed the weaker dollar because it was “good for us”. His remarks extended the U.S. currency’s recent slide.

The euro is now up 4 percent against the dollar in 2018, and 7.2 percent over the last six months.

Europe’s single currency also rose as much as 0.4 percent against sterling after earlier trading flat.

BOND YIELDS JUMP

Analysts said that Draghi not talking down the euro, as well as positive comments on the economy, sparked a sell-off in government bonds.

“What is striking is that he’s trying his best to push out rate hike expectations but the market appears to be ignoring that,” said Kim Liu, senior fixed income strategist at ABN AMRO.

German government bond yields rose to their highest levels in around six months, reversing early falls. The German 10-year Bund yield rose as high as 0.579 percent and was set for its biggest one-day rise in two weeks.

Two-year bond yields hit minus 0.56 percent.

French 10-year bond yields also attained a 6-month high around 0.9270 percent, while 10-year borrowing costs across the euro area were 2-5 basis points higher on the day.

Spain’s 10-year bond yield was up 5 bps ay 1.415 percent , set for its biggest daily jump in over a month.

Mizuho rates strategist Antoine Bouvet said the sell-off in bonds was also caused by Draghi’s emphasis on the size of the central bank’s balance sheet, which was supportive for the economy, rather than its asset purchase flows.

Reporting by Tommy Wilkes, Jemima Kelly, Fanny Potkin, Saikat Chatterjee, Abhinav Ramnarayan and Dhara Ranasinghe.; editing by Jon Boyle

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