ECB's Draghi assessing impact of strong euro

BERLIN (AP) ? Mario Draghi, the president of the European Central Bank, went beyond what was expected and indicated that he and his fellow policymakers are keeping a close watch on the recent strength of the euro ? and the effect it is having on Europe's faltering recovery.

Though Draghi said Thursday that the recent appreciation of Europe's single currency was a sign of confidence following its debt crisis-related traumas over the past few years, he indicated that it could prompt a policy response.

"However, the exchange rate is not a policy target but it is important for growth and price stability," he said in a press briefing after the bank kept its main interest rate unchanged at the record low of 0.75 percent.

"We will want to see if the appreciation will alter our assessment as far as price stability is concerned," he added. "We will closely monitor money market developments."

Though the euro has clearly benefited from the region's easing debt crisis, analysts also say a more aggressive Japanese economic policy designed to revitalize the country has indirectly pushed up the value of the single European currency. This rising exchange rate has major impacts for the economy of the 17 European Union countries that use the euro. It could raise the price of exports, unappetizing news for many hard-pressed businesses across the recessionary eurozone. That prospect of lower activity could weigh on prices ? as would the lower import costs that the high euro could engender.

If inflation, which Draghi said is expected to fall below 2 percent in the months to come, drops by more than anticipated, then it could pave the way for interest rate reductions.

The scale of the comments surprised traders who thought he would bat away any comments regarding the euro in a manner similar to his predecessor, Jean-Claude Trichet.

The euro took a nosedive after those remarks, trading a full euro cent lower at $1.3450.

His remarks on the euro came after a cautiously upbeat assessment of the prospects of the eurozone economy.

As well as predicting that inflation will likely fall below the target in the coming months, Draghi said economic growth would likely resume thanks to low borrowing rates, an improvement in financial market conditions and a pick-up in global demand.

Draghi said risks to inflation are "broadly balanced" but that the risks to growth are "to the downside."

Associated Press

Source: http://hosted2.ap.org/APDEFAULT/f70471f764144b2fab526d39972d37b3/Article_2013-02-07-European%20Central%20Bank/id-b774dba0fad049d09e995d7bf9ff3179

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