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Dollar rises for second day as shorts unwound before European Central Bank policy decision

21 July 2017

Global stock markets tracked Wall Street higher ahead of comments from European Central Bank President Mario Draghi which will be dissected by traders in terms of what they mean for the future of the bank's monetary stimulus.

He emphasized the lack of a pickup in underlying inflation, insisted the Governing Council won't really think about tapering until the fall, and banged away on how the central bank could actually ramp up its quantitative easing program, should conditions deteriorate.

The European Central Bank has left its interest rate benchmarks and policy statement unchanged, underlining the bank's unwillingness to roil markets with premature signals about an exit from its stimulus efforts as the economy recovers.

The bank's quantitive easing and low interest rates were created to fend off deflation.

The ECB is committed to continuing it program of €60 billion a month in bond purchases through the end of the year, "or beyond".

The bond-buying programme, together with ultra-low interest rates, was created to fend off the threat of deflation hitting the eurozone.

"With inflation firmly under control, the Reserve Bank showed courage by breaking out of its paradigm of being fearful of lowering interest rates", said union UASA spokesperson Andre Venter.

The dollar's gain was more striking against the relatively higher yielding currencies such as the Australian dollar and the kiwi against which it has suffered heavy losses in recent weeks as investors added carry trade bets.

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The next monetary policy meeting takes place on 7 September, but the specific date for announcing a change was "deliberately kept open", Draghi said.

Draghi emphasised the weakness of inflation across the Eurozone.

ING's Chief Economist Carsten Brzeski said following the announcement that Draghi should be expected to emphasize the continued presence of the European Central Bank.

'We require this clarification on the financial settlement, on citizen's rights, on Ireland - with the two key points of the common travel area and the Good Friday Agreement - and the other separation issues where this week's experience has quite simply shown we make better progress where our respective positions re clear'. Asset purchases at the current monthly pace of 60 billion euros (69.39 billion USA dollars) will continue until the end of December 2017, or beyond if necessary.

The timing for annual inflation to reach around 2 percent will likely be around fiscal 2019, the bank said.

The core measure, which strips out unprocessed food and energy, edged up to 1.2 percent on the year but remains low.

A report released by the Labor Department on Thursday showed a much bigger than expected decrease in first-time claims for US unemployment benefits in the week ended July 15th.

As a result the GBP EUR exchange rate remained biased to the downside, with the prospect of an imminent Bank of England (BoE) interest rate hike significantly diminished.

Dollar rises for second day as shorts unwound before European Central Bank policy decision