Euro gains after ECB comments on ending stimulus

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The euro rose to a nearly two-week high against the dollar on Wednesday after officials said the European Central Bank could wind down its stimulus program by the end of the year, as inflation has risen to its target.

Europe’s common currency was on track to post its largest weekly gain versus the dollar since mid-February.

Having revived growth with an unprecedented 2.55 trillion euro ($2.99 trillion) bond purchase program, the ECB has been debating whether to end the purchases this year as the threat of deflation has passed and the bloc is on its best growth run in a decade.

Many traders have expected the central bank would remain cautious at its next policy meeting, on June 14, given the uncertainty caused by a political crisis in Italy.

But ECB chief economist Peter Praet said on Wednesday the central bank would debate next week whether to unwind bond purchases gradually.

Praet's comments pushed the euro to $1.1796 EUR=, the highest level since May 22. It was last up 0.5 percent at $1.1775.

“A breach of the $1.18 barrier will attract more euro bulls,” said Viash Sreemuntoo, corporate trader at XE.

Germany’s central bank head said market expectations for an end to bond-buying this year were plausible.

“The ECB had been somewhat cagey about how it will end the stimulus program precisely beyond September,” said Richard Franulovich, head of FX strategy at Westpac in New York.

“Delaying a decision until September was never a realistic possibility. That would raise a fairly disorderly adjustment for markets,” he added.

As well as boosting the euro, analysts said the comments would introduce heightened volatility in the options markets over the ECB meeting.

The euro’s rise put pressure on the U.S. dollar index .DXY, which measures the greenback versus a basket of six major currencies. The index fell 0.3 percent to 93.623.

The ECB comments followed a speech by Italy’s new prime minister, Giuseppe Conte, whose promise of radical change had a mixed impact on the euro.

“The Italians have a government and it is doing what it said it would do,” said John Taylor, president and founder of research firm Taylor Global Vision in New York.

“In itself that should be normal, but in this case it is shocking to the idea of Europe as it has be constructed by Brussels, the German government and the ECB/Bundesbank,” he added.

Reporting by Gertrude Chavez-Dreyfuss; Editing by Dan Grebler and Leslie Adler