FOREX-Dollar shines as European central bankers recommit to easy money

Thu Jul 4, 2013 10:34pm EDT

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By Wayne Cole and Hideyuki Sano

SYDNEY/TOKYO, July 5 (Reuters) - The U.S. dollar rallied broadly on Friday after the European Central Bank and the Bank of England blindsided markets with decidedly dovish policy guidance, leaving the U.S. Federal Reserve as the only major central bank with any inclination to rein back stimulus.

The dollar could extend its gains if the upcoming U.S. employment figures show improvements in line with the Fed's forecast.

"At the moment, I see few reasons to sell the dollar given relative strength in the U.S. economy. Even if today's numbers are weak, that is unlikely to lead to a long downtrend in the dollar," said a trader at a Japanese trading house.

The euro fetched $1.2903, slightly down on the day after having fallen 0.9 percent on Thursday to hit a five-week low of $1.2883 at one stage.

The British pound hit a fresh five-week low of $1.5026 in Asia on Friday, stripped of gains made earlier in the week and having sunken 1.3 percent on Thursday.

The dollar index made a swift turnaround, climbing from to as high as 83.906 , the highest since late May.

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

ECB chief Mario Draghi followed up by ending the bank's 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 the 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 from 7.6 percent in May, edging closer to "the vicinity of 7 percent", which Fed Chairman Ben Bernanke has signalled as a level to stop bond buying.

Many traders expect the Fed to start reducing its stimulus in September and to end it all together within a year.

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.

The U.S. dollar also gained 0.3 percent to 100.38 yen , but faces stiff resistance in the 100.90/101.00 area.

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