European Central Bank holds steady course as currency war fears mount

A growing sense of anticipation and excitement was felt across financial markets on Thursday ahead of the European Central Bank’s first policy meeting of the year. Mnuchin, speaking at the World Economic Forum in Davos said that a weaker dollar was good for trade, while also talking about new tariffs and trade pacts.

Mnuchin argued that “it’s a very, very liquid market, and we believe in free currencies”.

The US Dollar’s (USD) current dip continues to benefit the Australian Dollar, with markets concerned that America’s latest implementation of tariffs will provoke a trade war.

A strong euro typically hurts European exporters whose products become less competitive against rivals producing in a weaker currency. Markets will be looking to the ECB’s statement and Draghi’s press conference while expecting to see no changes to the monetary policy.

Draghi also notes that the exchange rate presents a source of uncertainty, which needs monitoring.

Mr Draghi cited an International Monetary Fund communique from previous year, signed by the U.S., which said: “We will refrain from competitive devaluations, and will not target our exchange rates for competitive purposes”.

But it was his comments on currency that resonated most from a news conference following the ECB’s regular policy meeting.

One risk, however, is that other countries might retaliate by taking measures that lower their currency.

25 that the euro’s recent rise was partly the result of comments by a senior US official that violated an worldwide commitment not to manipulate currencies.

The dollar pared some of its losses after USA senators struck a deal to lift a three-day government shutdown but it was mired near a three-year low against a basket of currencies on lingering concerns about its yield advantage being chipped away.

Earlier on Thursday, ECB policymakers kept key interest on hold and their mass bond-buying programme unchanged, leaving their massive support for the eurozone economy in place.

Attention has been focused on when the bank will end the 30 billion euros ($36 billion) in bond purchases, a step that pushes newly printed money into the economy to raise inflation and support the recovery. Executive Board member Yves Mersch and Governing Council members Jens Weidmann and Ardo Hansson have all said the European Central Bank should recognize that the euro area’s strongest expansion in a decade will eventually boost inflation. Germany’s Ifo index of business sentiment matched its record high in January, and surveys show business activity is expanding rapidly.

That wording was last used in September after a 14 percent gain since the start of the year – and prompted the euro to weaken over the next two months.

He spoke after the bank left its stimulus levels and interest rates unchanged.

The ECB chose to keep interest rates in the eurozone on hold, with the focus now on ECB president Mario Draghi’s usual press conference following the release of the statement on rates.