(Adds details, context, comments)
By Yoruk Bahceli and Dhara Ranasinghe
LONDON, Sept 10 (Reuters) - The euro and German government
bond yields jumped to their highest in a week on Thursday after
ECB chief Christine Lagarde said the ECB is watching the euro
closely but stressed there is no foreign exchange target.
The 10% appreciation of the euro since the end of May, to
highs unseen since 2018, has caused concern that a strong
currency could dent the bloc's economic recovery and weigh on
already weak inflation.
That had led markets in recent sessions to price in a more
dovish tone from the ECB and lifted expectations for further
stimulus down the line.
Lagarde reiterated that while the bank monitors the currency
closely, it does "not target the exchange rate". She also noted
the pressure from a rising euro on the bloc's inflation, which
turned negative in August for the first time since 2016.
"The balanced tone struck by the ECB at today's meeting was
less dovish than many investors may have been expecting," said
Jai Malhi, global market strategist at J.P. Morgan Asset
Management.
"Today's meeting highlights that the fiscal policy and the
European Recovery Fund will be the main lever of stimulus in
this crisis and that the ECB will likely be the supporting act."
The euro rose to its highest level in a week at $1.1917 and
was last up 0.8%. Germany's 10-year bond yield also rose to a
one-week high at -0.42%. DE10YT=RR
"It's a bit of a balancing act for the ECB. On the one hand
Lagarde is mentioning the euro is a dampening factor on
inflation but at same time the ECB didn't revise down its
inflation projections," said Carsten Brzeski, chief economist,
euro zone at ING.
The ECB kept its inflation projection unchanged at 0.3% for
this year, but upped its 2021 projection slightly to 1% from
0.8% in June. "So there is a two-sided message that is being taken by
markets as not dovish but owlish, which is just how Lagarde
wants to be perceived," he said.
Brzeski said he still expects the ECB to expand its pandemic
emergency bond purchases by the end of the year.
While the euro rose sharply, it remained below the
closely-watched $1.20 level that prompted ECB chief economist
Philip Lane last week to warn that the exchange rate matters for
the bank.
Ten-year yields on Italian bonds, a key beneficiary of ECB
stimulus, rose off session lows, but were still unchanged on the
day at 1.09% IT10YT=RR . The risk premium they pay on top of
German debt was at 151 bps, lower than recent one-month highs.
DE10IT10=RR
"Markets know there is very little that the ECB can actually
do to weaken the currency. Rates are almost as low as they can
possibly go and the various asset purchase and lending programs
are already sizable," said Seema Shah, chief strategist at
Principal Global Investments.
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Euro, bond yield react to ECB's Lagarde https://tmsnrt.rs/2RbzS6v
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