FOREX-US dollar leaps as ECB & BoE recommit to easy money

Thu Jul 4, 2013 7:03pm EDT

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By Wayne Cole

SYDNEY, July 5 (Reuters) - The U.S. dollar sped higher on the euro and sterling on Friday after the ECB and BoE both blindsided markets with decidedly dovish policy guidance, leaving the Federal Reserve as the only major central bank with any inclination to rein back stimulus.

The single currency slid 0.9 percent to a five-week low of $1.2884 at one stage before steadying at $1.2910 in early Asian trade, thanks to bids from regional central banks. The pound was stripped of gains made earlier in the week and sank 1.3 percent to a trough of $1.5054.

The dollar index made a swift turnaround, climbing from 83.086 to 83.762 and the highest since late May.

The first shock came when the Bank of England under new governor Mark Carney broke with tradition and issued a statement that the market's pricing of future rate rises was unwarranted.

Mario Draghi at the European Central Bank followed up by ending its taboo on forward guidance, saying low rates would remain for an extended period of time.

In his media conference after the policy meeting, Draghi drove home the dovish message by revealing there had been extensive discussion about cutting rates.

European stocks bounded higher while bond yields fell. The premium paid by US 10-year Treasury yields over German Bunds widened to its highest since April 2010.

"The general message is that the possibility of further monetary stimulus in the near term is very high," said Martin McMahon, European economist for Commonwealth Bank of Australia.

"That easing would probably come in the form of a refi rate cut to 0.25 percent, with a realistic prospect of a negative deposit rate," he added. "Further action at the August 1st ECB meeting may be a little early. But there is a strong chance of another rate cut after the summer break."

All of which is in stark contrast to the Fed, which plans to start tapering its stimulus before year-end should the U.S. economic recovery proceed as hoped.

The possible timing of that tapering will, however, depend on the flow of data and there are few more important than the payrolls report due later on Friday.

Forecasts favour a rise of 165,000 in employment, with the jobless rate ticking down to 7.5 percent.

However, dealers are well aware that the series has a tendency to disappoint in June. Over the past sixteen years the report has come in under expectations 75 percent of the time with an average miss of 70,000. In addition, four of the last five June releases have fallen short of forecasts.

For now though, the euro and sterling were down pretty much across the board. The single currency fell back to 129.39 yen , from a high of 130.20. It also suffered a sharp reversal on the Australian dollar, diving 1.4 percent to A$1.4110.

The U.S. dollar inched higher on the yen to 100.26, but faces stiff resistance in the 100.90/101,00 area.

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