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Last Updated:[07-09-2012 02:10:15 EDT] Zoom in Zoom out Back to Tradenews

ECB holds key interest rate at record low of 0.75%, euro rises

tradenews FRANKFURT (Germany): The European Central Bank leaves its benchmark interest rate unchanged at 0.75 percent, holding off on further stimulus for the slowing eurozone economy.

Markets and analysts are focused instead on bank President Mario Draghi's news conference later on Thursday, where he is expected to give further details about the bank's efforts to lower borrowing costs for heavily indebted governments.

The bank has said it is willing to buy up the government bonds of struggling countries such as Spain and Italy, this would lower their borrowing costs. But the ECB expects them to first ask for help from the eurozone bailout fund. Markets want to know other key details, such as how big the purchases could be, and what kind of conditions would come attached to the help.

The euro rose on Thursday after the European Central Bank left interest rates unchanged, but gains looked fragile on concerns the bank's plan to stem the debt crisis, set to be announced later in the day, may fall short of expectations.

The single currency rose to $1.2652, its highest since early July, from around $1.2615. Some in the market had been bracing for an interest rate cut by the ECB to support flagging growth in the euro zone.

"This is the conventional reaction since there were people who were expecting a rate cut," said Daragh Maher, strategist at HSBC. "No rate cut means a higher currency and a few stops got cleared at $1.2640. But the market is really waiting for what Draghi has to say."

The euro rallied on Wednesday after a string of leaks from euro zone officials made markets more confident that the ECB President Mario Draghi will back up his pledge to do "whatever it takes" to save the euro.

Two central bank sources told Reuters on Wednesday Draghi would give no details of planned amounts or explicit targets for spreads or interest rates.

Most market players saw limited gains for the euro even if the ECB gave more details than expected. The single currency has risen from a two-year low of $1.2042 struck in late July on speculation Draghi will unveil a new bond-buying programme to curb high Spanish and Italian borrowing costs.

But with expectations running high, many market players warned there was scope for profit taking and disappointment, given Draghi may be unable to disclose specifics of the plan.

"I think Draghi will disappoint in the respect he will not give us a fully-fledged list of details which would allow us to asses the risks or the chances of his programme," said Ulrich Leuchtmann, head of FX research at Commerzbank. "But I don't think we will see a collapse in the euro or a collapse in the Spanish bond market because we are only missing details."

Leuchtmann said if Draghi's news conference at 1230 GMT did fall short of expectations the euro could test the previous day's low of around $1.2501 before finding support.

Source : Economic Times

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