By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The euro backed off session highs against the U.S. dollar Thursday after European Central Bank President Mario Draghi started his first press conference as head of the central bank on a sour note, citing intensifying downside risks for the European economy.
The shared currency had gained strength earlier after the ECB unexpectedly cut its benchmark interest rate.
The euro also found support amid reports that Greece’s prime minister would resign — seen as a positive because it could eliminate the need for a national referendum on the country’s latest bailout package. The prospect of putting the package of austerity measures to a public vote had heightened uncertainty about Europe’s future and rocked markets earlier this week.
The euro EURUSD +0.1910% traded at $1.3748. It had touched a high of $1.3835 before slipping under $1.37 during the press conference. Recent levels were near flat with $1.3745 in North American trading late Wednesday.
The dollar index DXY -0.10% , which measures the U.S. unit against a basket of six major rivals, briefly turned higher and recently traded at 77.039, also close to flat with 77.096 on Wednesday.
The European Central Bank cut its key lending rate by a quarter of a percentage point. Read story on ECB.
Mario Draghi, the central bank‘s newly installed president, also said inflation, while elevated, will drop next year and its nonstandard policy measures -- such as buying European bonds -- are temporary.
“Clearly the central bank is less than happy about the early signs of fallout on the real economy from the sovereign debt crisis,” said Andrew Wilkinson, chief economic strategist at Miller Tabak.
”The discussion probably left policy makers with the choice of delivering an immediate rate cut or being faced with having to act in response to a deepening crisis between meetings should pressures mount ahead of an uncertain Greek referendum.”
Draghi “may show an increased willingness to ease monetary policy further as the ongoing turmoil within the financial system dampens the growth prospects for the euro-area,” said David Song, currency analyst at Daily FX. Read more about Draghi and the ECB.
“As the debt crisis heightens the risk of a double-dip recession, we may see an increased reliance on the ECB to balance the risks for the region, and the Governing Council may have little choice but to expand its nonstandard measures further as European policy makers struggle to meet on common ground,” Song said.
The euro started lower in the Asian session, the morning after European leaders suspended Greece’s next round of aid pending a referendum on the country’s latest rescue package.
Europe demands a decision
European leaders, meeting in Cannes, France, on Wednesday night ahead of the Group of 20 summit, increased pressure on Athens, saying it was up to the country to decide whether it wants to remain in the euro zone. An austerity referendum for Greece is expected in early December, while Prime Minister George Papandreou’s government faces a confidence vote on Friday.
German Chancellor Angela Merkel and French President Nicolas Sarkozy said the disbursement of Greece’s next round of aid from the European Union and the International Monetary Fund has been suspended pending Greece’s adoption of the measures that European leaders had agreed on in a summit last week.
Papandreou’s decision Monday to call a referendum blindsided European leaders and members of his own ruling PASOK party.
Many analysts hadn’t expected Draghi to cut rates at his first meeting, at a risk of indicating he’s less hawkish than his predecessor. Still, growing fears of a recession for the euro zone had boosted prospects for a rate cut by next month.
“The one lesson of the crisis that Europe should have taken on board is that there is no value in waiting,” wrote strategists at FxPro before the ECB decision.
Also Thursday, the British pound GBPUSD +0.4519% rose to $1.5994 from $1.5950.
Against the Japanese yen, the dollar USDJPY -0.0961% traded at ¥77.99, little changed from ¥78.10.
Deborah Levine is a MarketWatch reporter, based in New York.
William L. Watts is a reporter for MarketWatch in Frankfurt.
