June 27, 2017 / 9:36 AM / 6 months ago

FOREX-Euro surges on Draghi comments, dollar slips

* Euro surges on Draghi comments

* Fed Chair Yellen to speak in London later on Tuesday

* Fed officials stick to hawkish message

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

By Ritvik Carvalho

LONDON, June 27 (Reuters) - The euro surged to its highest in over a week against the dollar on Tuesday after European Central Bank President Mario Draghi said factors weighing on inflation in the euro zone were mainly temporary and the Bank could look through them.

Speaking at the ECB’s annual policy forum at Sintra in Portugal, Draghi highlighted a recovering euro zone economy and said that deflationary forces had been replaced with inflationary ones, but added that stimulus in the form of the ECB’s monetary support was still needed.

That sounded to investors, however, like he was ready to give more ground on German demands that the ECB get on with starting to reduce the volume of extra euros it is feeding monthly into the economy.

The euro surged as Draghi spoke, rising as much as half a percent on the day to $1.1255, its highest level since Jun. 14. It had earlier traded around the $1.1187 mark.

“Draghi’s comments I would say were quite optimistic on the growth outlook, talking about a broadening recovery and even saying growth was above trend,” said Niels Christensen, currency strategist with Nordea bank in Copenhagen.

“While talking about inflation he said mainly temporary factors were slowing inflation at the moment, so he’s not too concerned about the fallback in at least headline inflation.”

Draghi’s comments contrasted with a dovish tone he took on Monday, saying that super low interest rates create jobs, foster growth and benefit borrowers, while rejecting calls to exit super easy monetary policy quickly.

The single currency’s strength pulled the dollar index - which measures the dollar against a basket of currencies - to an eight-day low of 96.973.

The greenback was also 0.3 percent lower against the Japanese currency at 111.560 yen, having earlier risen to a near five-week high of 112.075 in Asian trading.

Investors were awaiting speeches by Federal Reserve officials for signs on whether the central bank will stick to its guns and raise rates this year.

Fed Chair Janet Yellen addresses the British Academy in London at 1700 GMT, less than two hours after an address by Philadelphia Fed President Patrick Harker in the same city at 1515 GMT.

Fed officials have signalled they will look through a slowdown in inflation and continue on their current trajectory of interest rate hikes - though investors are sceptical and market pricing shows only a 40 percent chance of a rise at the Fed’s December meeting.

A positive view from Yellen despite a recent batch of weak U.S. economic data would support the Fed’s forecast for another rise in policy rates this year.

“A notion increasingly shared in the market ... is that the Fed is continuing to normalize monetary policy regardless of more muted inflation developments - this is the message which has been provided during the last week by several Fed speakers,” said Manuel Oliveri, currency strategist with Credit Agricole in London.

“This suggests that the market-based rate expectations have additional room of adjusting to the upside should this notion become even a bigger one.”

Sterling was up 0.2 percent at $1.2748 ahead of the release of the Bank of England’s Financial Stability Report and a speech by BoE governor Mark Carney.

The pound see-sawed last week after Carney and the Bank’s chief economist Andy Haldane gave opposing commentary on their stance towards raising record low UK interest rates, compounding a split at the Bank’s rate-setting committee.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Reporting by Ritvik Carvalho; additional reporting by Tokyo markets team, editing by Pritha Sarkar)

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