Euro Falls as ECB Lowers Inflation Forecasts

By Christopher Whittall Features Dow Jones Newswires

The euro slipped against the U.S. dollar after the European Central Bank lowered its inflation forecasts at its meeting Thursday.

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The currency's fall came despite ECB officials dropping a reference to the possibility of lowering interest rates in their regular monetary policy statement. Lower interest rates tend to make euro-area assets less attractive to investors and weaken the currency.

The euro briefly dipped below $1.12 following the announcement. It later recovered to trade at $1.1218, down 0.4% on the day.

Investors were expecting a revision to inflation projections following media reports Wednesday that said the ECB was preparing to cut its inflation outlook. That may have limited Thursday's currency move given the euro fell on the back of those reports that day.

ECB President Mario Draghi said the central bank had lowered its inflation forecasts to 1.5% in 2017 from 1.7% previously, to 1.3% in 2018 from 1.6% beforehand and 1.6% in 2019 from 1.7%. Lower inflation could point to lower rates and other looser monetary policy, such as continued bond buying, which would hit the euro.

German government bonds rallied slightly, with the yield on the 10-year note declining around 0.03 percentage point to 0.252% following the announcement, according to Tradeweb. Yields fall as prices fall.

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Eurozone bank shares, which had earlier led the day's stock market gains, traded in negative territory after the ECB press conference, tracking the decline in bond yields.

Riskier eurozone government debt, meanwhile, held on to gains made earlier in the day. The yield premium to hold 10-year Italian government debt over ultrasafe German bonds remained around 0.1 percentage point lower on the day at roughly 1.92 percentage point, according to Tradeweb. Italian bonds received a boost following reports Thursday the country is now unlikely to hold snap elections.

ECB officials said in their statement that the bank's EUR60 billion ($67.55 billion) monthly purchase program would continue until at least the end of 2017 and could be increased or extended if needs be. The ECB's bond buying has helped support riskier debt markets in recent years.

Riva Gold contributed to this article.

Write to Christopher Whittall at christopher.whittall@wsj.com

(END) Dow Jones Newswires

June 08, 2017 09:56 ET (13:56 GMT)