Explanation

LONDON (Thomson Financial) - The euro fell sharply on dovish comments from a euro zone central banker, before hitting support levels and appearing to stabilise at weaker levels.

Yves Merkel, Luxembourg central bank chief and member of the European Central Bank, said in an interview that 'there are factors that mitigate inflation risks' and suggested the ECB could 'look through' temporary high levels of inflation to the growth risks beyond.

The downside risks to the euro zone economy have increased, he signalled.

'Yves Mersch's transformation from hawk to dove has amazed the market,' said Peter Wadkins at Thomson IFR Markets.

'The market realizes this is a sea-change in policy, and the implications are enormous,' he added, predicting that ECB president Jean-Claude Trichet will also reveal a more dovish tone in the days to come.

Markets have previously understood the ECB would not cut interest rates for some time, due to inflation concerns.

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