October 25, 2018 / 1:23 AM / a month ago

Draghi's determined tightening sends euro to two-month low

NEW YORK (Reuters) - The euro fell to a two-month low on Thursday after European Central Bank President Mario Draghi said the bank would pursue its tightening policy despite fears about the monetary union’s economic and political future.

FILE PHOTO: European Central Bank (ECB) President Mario Draghi testifies before the European Parliament's Economic and Monetary Affairs Committee in Brussels, Belgium September 24, 2018. REUTERS/Francois Lenoir

The ECB reaffirmed that its 2.6 trillion euro ($2.97 trillion) asset purchase programme will end this year and that interest rates could rise after next summer. The policy guidance has been consistent since June, even though the economic outlook has darkened while political turmoil in Italy looms over the currency bloc.

Although Draghi said he was confident the European Commission and Rome would reach a compromise over Italy’s budget plans, he failed to allay concerns about the risk of contagion from surging borrowing costs.

The single currency rose immediately after the central bank’s rates announcement, then began to sell off “once Draghi started speaking again and highlighted the risks around Italy and Brexit,” said John Doyle, vice president of dealing and trading at Tempus, Inc.

The euro’s decline was the primary reason for Thursday’s jump in the dollar index, said Doyle. It was amplified, however, by the rise in U.S. stocks on Thursday as Microsoft Corp’s (MSFT.O) strong earnings helped Nasdaq-listed companies stage a rebound from the tech-heavy index’s worst decline since 2011 in the previous session.

Against the dollar, the euro fell to $1.135, its lowest since Aug. 16. The single currency was last down 18 basis points on the day. The dollar index hit a two-month high of 96.732, last up 29 basis points from the open.

Sterling hit a six-week bottom of $1.280 after Draghi said the longer Brexit talks drag on, the more the private sector must prepare for the possibility that Britain could exit the European Union with no deal on future relations.

Elsewhere, the Japanese yen weakened, although the Swiss franc, a rival safe-haven currency, gained.

The yen fell to as low as 112.67 against the dollar, but nevertheless stayed 1.85 percent above its 2018 trough hit on Oct. 3.

The Swiss franc spiked against the dollar following the Draghi announcement, to as high as $1.002, but was virtually unchanged on the day against the euro, despite trading in a 51-basis-point range over the course of the day.

The Australian dollar, often viewed as a bellwether for global risk, rose 0.26 percent to $0.708. However, in a sign that worries about global growth, particularly in China, are beginning to bite, the offshore yuan hit a 22-month low, last at 6.955.

Reporting by Kate Duguid; Editing by David Gregorio, Dan Grebler and Richard Chang

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