Euro falls as Draghi voices deflation fears

Expectations that the European Central Bank is preparing an early round of quantitative easing were boosted by comments from Mario Draghi, ECB president, which hit the euro and drove peripheral euro zone bond yields lower yesterday.

In an interview with German business newspaper Handelsblatt, Mr Draghi said the threat of eurozone deflation was rising. "The risk that we don't fulfil our mandate of price stability is higher than it was six months ago," he said. "We are in technical preparations to alter the size, speed and composition of our measures at the beginning of 2015, should this become necessary, to react to a too-long period of low inflation. There's unanimity in the ECB council on that." His comments drove the euro down 0.6 per cent against the dollar to $1.2026 – passing its previous 17-month low, to hit its weakest point since June 2010.

Rising speculation that the central bank is poised to embark on full-scale quantitative easing lifted the bonds of the euro zone’s periphery nations, forcing their yields lower.

Ireland’s 10-year yield dropped to a new low of 1.164 per cent, France’s reached 0.784 per cent and Belgium’s reached 0.772 per cent.

Italy’s 10-year yield fell 9.6 basis points to 1.79 per cent, also a fresh record low, while Spain’s 10-year yield slid 7.2bps to 1.53 per cent. Portugal’s 10-year yield fell 21.7bps to a new low of 2.47 per cent.

Mr Draghi's comments echoed those earlier in the week by ECB chief economist Peter Praet who warned that falling oil prices were an increasing risk in destabilising inflation expectations. Mr Praet said the euro zone could suffer "negative inflation" for a large part of the coming year. "Inflation expectations are extremely fragile . . . the risk of second-round effects seems to be greater today than it was in the past," he added.

The euro has recently been hit also by concerns that Greece may be moving closer to exiting the euro zone, should the opposition Syriza party – which is gaining ground in the polls – win the general election later this month.

– (Copyright The Financial Times Ltd 2015/Bloomberg)