Euro zone bond yields fall as European Central Bank signals euro strength could prompt rate cuts

Short-end euro zone bond yields fell on Wednesday after European Central Bank policymaker Martin Kocher warned that further euro strength could force them to resume interest rate cuts.

The euro zone is a net energy importer, so even slight currency appreciations can significantly lower the price of energy and other imported goods, which could push inflation down.

Austrian central bank governor Kocher added that the gains so far in the euro were "modest" and did not require a response yet, but if sharper appreciation lowers inflation projections, then they may need to act.

Markets slightly added to bets of a rate cut by the summer. Futures imply about a 25% chance of a rate cut by July, from around 15% on Tuesday EURESTECBM5X6=ICAP.

Germany's 2-year bond yield DE2YT=RR, which is sensitive to changes in ECB rate expectations, fell 2.5 basis points to 2.076%, its lowest level in a week.

Germany's 10-year yield DE10YT=RR, the benchmark for the euro zone, was down 2 bps at 2.854%.

"EURUSD is nearing levels where we think the ECB will start to take notice," Jefferies economist Mohit Kumar said in a note on Wednesday.

The euro EUR=EBS has strengthened sharply against the dollar in recent days, rising above $1.20 on Tuesday after U.S. President Donald Trump said the value of the dollar was "great". That pushed the dollar =USD to multi-year lows against a basket of currencies, including the euro.

-Samuel Indyk/Reuters