Euro plunges under $1.12 as ECB officials signal further action

Frankfurt (May 19)  The euro dived back below $1.12 on Tuesday after European Central Bank officials said the bank could take further action to quash euro zone bond yields and boost inflation, potentially flooding the market with yet more euros.

ECB Executive Board member Benoit Coeure said the bank would buy more securities in May and June due to low market liquidity in July and August.

The comments, while carefully worded, come after a month of rises in German bond yields and the euro which thwart the main ways in which the bank's 1 trillion euros of quantitative easing aims to help the economy.

Fellow ECB governing council member Christian Noyer said the bank was ready to take further action to meet its inflation target and the single currency sank as much as 1.3 percent to a one-week low of $1.1160. It last traded down 1.11 percent at $1.1193.

"It's the first indication from the ECB that they're not happy with the unwinding of the whole QE dynamic in the market that involved lower bund yields, lower euro," said Ian Gunner, portfolio manager of the Altana Hard Currency Fund in London.

"We've started to see that unravel a little bit in the last couple of weeks and this is the first indication that they're uncomfortable with it ... This is a mild protest against the extent of the move ... and (the reaction) just shows you how sensitive the market is to these kind of comments."

A weaker euro allows the 1 trillion euro asset-purchase programme to feed through into higher inflation and stronger growth in the euro zone. But having traded as low as $1.0457 in March, the single currency has since gained almost 10 percent to hit $1.1468 late last week, lifted by rapid rises in euro zone bond yields.

Coeure said the recent European government bond market selloff was a normal correction but said he was worried by how fast that had happened.

Mannheim-based think tank ZEW said on Tuesday its monthly survey of German economic sentiment fell to 41.9 points from 53.3 in April, undershooting a Reuters consensus forecast of 49.0 and coming in below even the lowest forecast of 44.2.

German growth slowed to 0.3 percent on the quarter in the first three months of 2015, after a 0.7-percent expansion in the final quarter of 2014. Foreign trade weighed on the economy in the January to March period.

Benefiting from its gains against the euro, the dollar traded up almost 1 percent against a basket of major currencies at 94.86. It had already traded higher overnight on the back of a rise in U.S. debt yields.

But there was still some caution about the near-term outlook for the dollar, given the recent run of disappointing U.S. economic data.

"To give it more legs you do need to see some real evidence that the growth trajectory into the second quarter has gained momentum," said Mitul Kotecha, head of Asia-Pacific FX strategy for Barclays in Singapore.

The New Zealand dollar rose 0.4 percent to $0.7410 after a central bank survey showed a pick-up in inflation expectations, cooling some speculation of a possible cut in interest rates in coming months.

Source: CNBC