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Euro Plunges After Cautious ECB Comments

Thomas Lohnes | AFP | Getty Images

The euro plunged against the dollar and yen on Thursday after ECB President Mario Draghi said the euro exchange rate was important to growth and price stability, which investors took as a sign the bank is concerned with the single currency's recent advance.

The euro had earlier maintained gains after the European Central Bank held its main interest rate at a record low of 0.75 percent on Thursday. The rate announcement was a reiteration of the bank's policy to see whether an economic recovery sets in later this year or is derailed by the euro's rise.

(Read More: Should Draghi Cut Record-Low Rates to Dampen Euro?)

But as Draghi began to speak at a press conference after the official rate announcement, the euro surrendered gains as investors heard his view that while economic activity in the euro area should gradually recover in 2013, there are more negative risks than positive ones.

The euro then fell further when Draghi said "the exchange rate is not a policy target, but it is important for growth and price stability and we certainly want to see whether the appreciation is sustained."

"Clearly he does not want to see the euro go much higher," said Boris Schlossberg, managing director at BK Asset Management in New York. "There is massive pressure from the French. He is signaling displeasure that it ran up so much."

The euro was last at $1.3398, down 0.9 percent on the day, with the session low at $1.3369, the lowest since Jan. 25. At the low it was the biggest one-day percentage drop since June.

The euro was down 1.0 percent against the yen at 125.38 yen, with the session low at 124.48 yen.

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Before Thursday's declines the euro had risen more than 2 percent against the greenback so far this year and over 10 percent versus the yen.

The appreciation of the euro on Feb. 1 to its highest against the dollar since November 2011 had prompted French President Francois Hollande to call for an exchange rate policy to protect the currency from "irrational movements".

But while the French have raised concerns a strong euro could derail exports and threaten a nascent euro zone recovery, the Germans have said the shared currency is not overvalued.

The euro zone economy contracted in the second and third quarters of last year, meeting the technical definition of recession, and the downturn is expected to have deepened in the fourth quarter.

"The economic weakness in the euro area is expected to prevail in the early part of 2013," Draghi told the news conference.

Risk of Overshooting

Some analysts cautioned that the sell-off in the euro may be too far, too fast and only short-term.

Christopher Vecchio, currency analyst at DailyFX in New York, noted Draghi also said the high euro is a sign of confidence in the region.

"Any further euro losses should be limited beyond the initial knee-jerk that we've seen thus far today," said Vecchio.

A Spanish bond auction on Thursday drew healthy demand, but a slight rise in yields on the short-dated paper limited gains in the euro.

The dollar was down 0.1 percent against the yen at 93.58 yen, but still within reach of the peak touched on Wednesday, the highest since May 2010.

Sterling rose Thursday after incoming Bank of England governor Mark Carney showed little bias toward immediate looser monetary policy, wrong-footing many investors who had expected him to be more dovish.

The pound was last up 0.3 percent at $1.5708 as investors who had bet on hints of more aggressive easing measures from Carney, who takes the helm in July, covered short positions.

The Bank of England said it was keeping interest rates on hold at 0.5 percent and the quantitative easing total unchanged at 375 billion pounds.

Traders cited buying by an Asian central bank before sterling ran into offers around $1.5775-90.

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