Jan 2, 2015 3:40 PM

Euro sinks after ECB chief gives stimulus hint

The Associated Press

LONDON (AP) The euro slid to a 4-1/2 year low against the dollar on Friday after the head of the European Central Bank hinted at plans to fight alarmingly low inflation across Europe.

In an interview with Germany's financial daily Handelsblatt, Mario Draghi, the ECB's president, said that the bank is more at risk of failing to keep prices stable than it was just six months ago.

"We have to avoid too-high inflation and we have to avoid too-low inflation as well," Draghi said. "We are making technical preparations to alter the size, pace and composition of our measures in early 2015, should it become necessary to further address risks of a too prolonged period of low inflation."

Traders sold euros and bought U.S. dollars in response, driving the euro down 0.7 percent to $1.201 as of 3:37 p.m. Eastern time Friday. The euro hasn't traded below $1.20 since June 2010. Back then, Europe's financial markets were reeling as Greece, Ireland and other countries struggled under their debts.

For many in the markets, Draghi's comments were a clear hint that the bank stands ready to launch a full-blown bond-buying program similar to those undertaken by other central banks, such as the U.S. Federal Reserve and the Bank of England. Many experts think the ECB could make the announcement at its next monetary policy meeting on January 22.

Although the ECB has cut interest rates to record lows and backed the purchase of some private-sector bonds, it has refrained from a full-scale bond-buying program so-called quantitative easing, or QE.

The euro has been in retreat for months on the back of expectations that the ECB will back a further stimulus as traders anticipate more of the currency in circulation.

While anemic levels of economic growth across the eurozone are a major source of concern for policymakers at the ECB, it is too-low inflation that's prompting the speculation of further action.

Inflation in what is now the 19-country eurozone Lithuania adopted the euro on Thursday stands at 0.3 percent, far below the ECB's annual target of price increases just below 2 percent.

The worry is that weak inflation turns into a widespread drop in prices. Although that might sound good in principle, deflation can choke the life out of an economy if consumers put off purchases in the hope of future bargains, and companies struggle to remain profitable. Deflation can prove difficult to reverse, as evidenced by Japan's economic stagnation over the past two decades.

Proponents of quantitative easing say the policy can help shore up a recovery and support prices by reducing the borrowing costs for businesses, households and governments. The associated fall in the currency could also help boost growth by making exports cheaper and push prices up by making imports more expensive.

But officials in Germany, Europe's largest economy, say such a program would amount to throwing money at profligate states. Germans are concerned that the country's taxpayers will end up being burdened with the debts of Greece, Italy and Portugal.

Success is not guaranteed, as evidenced by Japan's return to recession even though the country's central bank is enacting its own bond purchase program.

"The comments suggest the ECB will soon adopt sovereign debt QE which may come as soon as their next meeting," said Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi UFJ.


Matthew Craft in New York and Geir Moulson in Berlin contributed.


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