The euro dropped to $1.1320 on Tuesday afternoon, coming off from a day's high of $1.1389, after media reports suggested that markets misinterpreted comments from the president of the European Central Bank, Mario Draghi.
Peter Boockvar, chief market analyst at The Lindsey Group, said: "One day of selling after what was clear in Mario Draghi's message and the ECB is already in panic mode as BN (Bloomberg News) prints a headline… The euro is dropping as are sovereign yields. This just proves how trapped they are that after just one speech and the market reaction that followed has the ECB already in a tizzy. What do they think will happen when further tapering actually takes place which we still expect to happen in September?"
Draghi told an audience Tuesday that the central bank will have to be prudent to gradually adjust its monetary stimulus to the economic recovery.
"The current context where global uncertainties remain elevated, there are strong grounds for prudence in the adjustment of monetary policy parameters, even when accompanying the recovery. Any adjustments to our stance have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure," Draghi said.
Markets interpreted his remarks as a sign that the bank was preparing to reduce its monetary stimulus.
Andrew Wilson, CEO of Goldman Sachs Asset Management International for EMEA, said in an email earlier this Wednesday: "Expectations were already building in the market before Mario Draghi spoke yesterday but his remarks have certainly moved things on: an announcement on tapering in September has moved from possible to more than probable and the big surprise now for us would be if he did not make one."
Reuters reported, citing sources, that the comments made by Draghi on Tuesday were misjudged by markets.
Draghi apparently wanted to signal tolerance for a period of weaker inflation and not a policy tightening after the summer.
On Tuesday, ECB Vice President Vitor Constancio told CNBC: "That being the case it justifies fully what the president (Mario Draghi) said at the end of his speech (on Tuesday) that we need persistence. If we want to bring inflation to our target of below but close to 2 (percent) then we have to persist in the type of monetary policy that we been adopting."