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Draghi Could Do This to Weaken the Euro

Mario Draghi
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Mario Draghi

The European Central Bank (ECB) President Mario Draghi's concerns over the impact of a strong euro on a weak euro zone economy raise the prospect of monetary easing to dent the currency's appeal, an analyst told CNBC.

The ECB chief said Monday: "while the exchange rate was not a policy target it was important to growth," adding that economic indicators signaled further weakness in the euro zone.

His comments were seen as negative for the single currency, which has fallen almost 3 percent from a 15-month high of $1.37 hit earlier this month, as European officials step up the rhetoric on a strong euro.

"The ECB has held rates at 0.75 percent and clearly it could pick up its own quantitative easing process. They (policy makers) would like to see a bit of downside (in the euro) from the current levels," said Martin Lakos, division director at Macquarie Private Wealth in Sydney.

"So we could see some more quantitative easing and even a cut in interest rates. We are seeing weak growth in the euro zone and they want to kick start that and a weaker euro would help," Lakos told CNBC Asia's "Squawk Box."

Interest rates in the euro zone have been steady since July 2012.

Talk of a "currency war" has gained momentum since the yen started to fall in November amid expectations of aggressive monetary easing from Japan. But at the Group of 20 nations meeting in Moscow over the weekend such talk was dismissed with the group declaring they would "refrain from competitive devaluation."

"It's interesting that we've had a lot of talk from the G-20 about countries not using their currencies for competitive purposes," Lakos said. "But let's face it, at the end of the day, with weak economic growth they all want their currencies to weaken and not all of them can do that."

The euro has been one of the best performing major currencies this year, with its strength stemming partly from growing confidence about the outlook for the euro zone economy and partly from weakness in other major currencies such as the yen and British pound.

In the past six months, the euro has gained about 8 percent against the dollar, 10 percent versus the British pound and soared 28 percent against the yen.

(Read More: Will Euro Kill Euro Zone Recovery?)

"We are starting to get a clearer idea that the $1.36 to $1.38 is an area they don't want to see," said Robert Rennie, global head of forex strategy at Westpac Bank in Sydney. "So I think the ECB is trying to prevent a break-up through that range, just through hints and suggestions at the moment."

Clifford Bennett, chief economist at White Crane Reports, meanwhile maintained his bullish forecast for the euro to rally to $1.50 this year – a gain of almost 13 percent from current levels.

(Read More: Euro Poised to Rise to $1.50, Pessimism Overdone: Expert)

Bennett told CNBC that he did not expect to see further monetary easing out of the euro zone because the region was showing signs of a recovery.

For example, the euro zone purchasing managers' index, a gauge of business activity, rose in January to its highest level in 10 months this after the economy shrank 0.6 percent in the fourth quarter from the previous one.

"As Draghi has alluded to, a high currency will help keep inflation down and that means the ECB will be able to keep interest rates down," said Bennett. "We can get to $1.50 and it won't hurt export competitiveness."

Draghi said Monday that inflation, which has eased to 2 percent in January, is expected to dip further in the near-term.

- By CNBC.Com's Dhara Ranasinghe; follow her on Twitter: @DharaCNBC

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