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Euro hits 2017 high after Darghi hints on tapering

The euro climbed to a fresh 2017 peak and eurozone sovereign bond yields reached five-week highs on Wednesday, as investors bet remarks by Mario Draghi were a signal the European Central Bank chief was poised to withdraw economic stimulus measures.

The EU currency’s pronounced strength led to pressure on shares in major exporters, which fell to the bottom of the region’s stock markets and left Germany’s Xetra Dax 30 underperforming its peers.

The euro’s rise extended Tuesday’s rally, which was sparked by upbeat remarks on the currency bloc’s economy from Mr Draghi, who said “deflationary forces have been replaced by reflationary ones”.

“Mr Draghi’s point in the speech was that the ECB needs to tighten just to stand still, as the dynamics of the eurozone economy improve without being disrupted by inflation,” said Mike Bell, global market strategist at JPMorgan Asset Management.

“Our view is that he will announce a tapering [of stimulus measures] in September, to begin in January. Yields in the eurozone were too low before today’s move. Today the market is lining up for an announcement on tapering.”

The yield on 10-year German debt was up 4 basis points to 0.41 per cent, and has climbed from 0.24 per cent since Monday. The more policy sensitive two-year Bund is up 3 basis points at minus 0.56 per cent.

The euro has set a new high for 2017 of $1.1366, up 0.3 per cent, adding to the previous session’s 1.4 per cent advance. It is now up more than 8 per cent for the calendar year.

So far this week, France’s 10-year yield is up 15 basis points at 0.75 per cent, Spain’s 10-year yield is up 11 bps at 1.48 per cent and Portugal’s 10-year benchmark is yielding 3.04 per cent, up 14 bps. Ten-year Bunds are at 0.38 per cent, up 12 basis points.

The jump in eurozone bond yields has also rippled around the world.

The yield on the US 10-year Treasury was at 2.23 per cent on Wednesday, up from 2.14 per cent on Monday — the highest level for the benchmark bond since the Federal Reserve raised interest rates earlier this month.

“I reiterate the danger that is the European bond market,” said Peter Boockvar, chief market analyst at the Lindsey Group. “As the ECB gets deeper into its taper, it can single-handedly drag US yields higher.”

Michael Cloherty, a strategist at RBC Capital Markets, said: “Even when it is market specific news to Europe, it affects pricing in the US.”

Additional reporting by Joe Rennison in New York