Euro dives under $1.12 as ECB officials signal further action

[May 19, 2015] By Jemima Kelly

LONDON (Reuters) - The euro dived back below $1.12 on Tuesday after European Central Bank officials said the bank could take further action to lower euro zone bond yields and boost inflation, potentially flooding the market with yet more euros.

Sterling also skidded, shedding over 1 percent to fall below $1.55 <GBP=D4> after data showed British inflation fell into negative territory last month for the first time since 1960.

ECB Executive Board member Benoit Coeure said the bank would buy more securities in May and June due to low market liquidity in July and August. He also said the recent European government bond market selloff was a normal correction but he was worried by how fast it had happened.

The comments, while carefully worded, come after a month of rises in German bond yields and the euro that thwart the main ways in which the central bank's 1 trillion euros of quantitative easing (QE) aims to help the economy.

"For the people who just focus on rates, and who think any ECB buying means lower rates, they say: lower rates, sell euro," said Marvin Barth, European head of FX strategy at Barclays in London.

"For the people thinking about it from a more fundamental perspective, ... they're saying: why is the ECB seemingly more concerned about these issues that we thought? Maybe we were a little bit too quick to suggest this reflation was happening ... and maybe we're not on a continuous uptrend in Europe."

Coeure's fellow ECB governing council member Christian Noyer said the bank was ready to take further action to meet its inflation target.

A weaker euro allows the ECB's QE programme to feed through into higher inflation and stronger growth in the euro zone. But having traded as low as $1.0457 in March, the single currency has since gained almost 10 percent to hit $1.1468 late last week, lifted by rapid rises in euro zone bond yields.

The single currency sank as much as 1.3 percent on Tuesday to a one-week low of $1.1160 after the comments.

"It's the first indication from the ECB that they're not happy with the unwinding of the whole QE dynamic in the market that involved lower bund yields, lower euro," said Ian Gunner, portfolio manager of the Altana Hard Currency Fund in London.

"We've started to see that unravel a little bit in the last couple of weeks ... This is a mild protest against the extent of the move ... and (the reaction) just shows you how sensitive the market is to these kind of comments."

Benefiting from its gains against the euro, the dollar traded up almost 1 percent against a basket of major currencies, hitting a one-week high of 95.05.. It had already traded higher overnight on the back of a rise in U.S. debt yields.

(Editing by Tom Heneghan)

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