Euro finds footing on hawkish policy remarks, lower energy prices

The euro was near a 15-year high on the yen and was firm against the dollar on Thursday, following hawkish remarks from European policymakers and the prospect of falling energy prices. At $1.0703 the common currency withstood a rising greenback after the European Central Bank's chief economist said he had not seen enough progress in taming inflation. Overnight, the euro touched its highest since 2008 at 161.73 yen, having broken out since the Bank of Japan left short-term rates on hold last week as investors see the pair as safer than navigating the risk of an intervention in dollar/yen.

The euro is also up 0.5 per cent this week to 87.14 pence.

Ireland's central bank chief Gabriel Makhlouf said on Wednesday that further interest rate hikes should not be excluded, something markets do not expect at all, while Bundesbank President Joachim Nagel said the "late mile" to the inflation target may be the toughest.

"While the market has been focusing on the prospects of rate cuts from (G10 central banks) next year, many of the respective central bankers have been pushing back against this speculation," said Rabobank senior strategist Jane Foley.

"As long as inflation remains above target, policy makers are likely to want to keep alive the risk of further tightening particularly since a significant drop in market rates could worsen inflationary risks."

The unloved yen failed to get much of a boost from a fall in U.S. Treasury yields, with the 10-year rate marking its lowest close since mid-September overnight, but the yen sliding back towards 151 per dollar. It was last at 150.99 in Asia morning trade. Elsewhere, falling oil prices were a welcome relief in Europe, but weighed on commodity-linked currencies such as the Australian and New Zealand dollars and the Canadian dollar.

The Australian dollar fell 0.5 per cent overnight and was last at $0.6405, just above its 50-day moving average.

It seems set for its largest weekly fall since June, as the central bank appeared to raise the bar for further hikes after lifting rates on Tuesday. The New Zealand dollar also nursed a modest overnight drop at $0.5910. The Norwegian krone is not far from its lowest levels of the year.

Former Italian Prime Minister and ex-ECB chief Mario Draghi told a Financial Times conference overnight Europe was almost certainly headed for recession, with higher energy costs one cause. Yet Brent crude futures are now down 12 per cent over the two weeks. Europe's record gas inventories continue to climb, too, as a warm start to autumn delays the onset of heating demand and high prices discourage industrial use and encourage continued imports.

In Asia, China's yuan touched a two-month high in overnight offshore trade. Reuters reported Chinese authorities had asked Ping An Insurance Group to take a majority stake in stricken property developer Country Garden. China's consumer prices fell in October, data showed on Thursday, stoking expectations for lower interest rates. "There are some growing market expectations for further rate cuts by the Chinese central bank given soft inflation prints and still narrow economic recovery," said Michael Wan, currency analyst at MUFG in Singapore. Later in the session, the focus will be on a speech from Fed Chair Jerome Powell. In the Middle East, Israeli forces battled Hamas militants at close range in Gaza City, yet heavy dollar selling from the Bank of Israel has helped drive the shekel back to pre-war levels of 3.83 to the dollar.