FOREX-Euro tumbles on ECB's low-rate policy, dollar rallies
* Draghi says euro zone growth risks tilted to the downside * U.S. jobless claims drop to 5-1/2-year low * U.S. ISM index rises to two-year high * Dollar/yen up more than 1 percent By Julie Haviv NEW YORK, Aug 1 (Reuters) - The euro dropped against the dollar on Thursday, on track for its weakest day in three weeks, after European Central Bank President Mario Draghi said interest rates in the euro zone will remain low for an extended period. The dollar, in contrast, rallied across the board, buoyed by U.S. data on jobless claims and manufacturing that showed the world's largest economy was recovering steadily. Draghi told a press briefing after the ECB left rates unchanged that risks to growth in the region are tilted to the downside, warranting a loose monetary policy. "The positive U.S. claims data contrasts to the cautious tone carried by Draghi and is forcing a widening in the yield gap between comparable benchmark bonds," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co LLC in New York. "The euro zone is several years behind the U.S. in terms of recovery and the dynamics of the upturn are built on a different foundation." The yield differential between U.S. 10-year bonds and German benchmark bunds has expanded in favor of the dollar to its widest in two weeks, lending support to the greenback. The euro fell as low as $1.3196 after Draghi's statement, the lowest in about a week, and was last at $1.3218, down 0.6 percent, its largest daily percentage drop since July 9. Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, however, said he does not expect further easing from the ECB, since the euro zone's economic performance so far was in line with the ECB's forecast. "The bar is high to additional easing," Chandler said. The dollar was firmly in demand, soaring 1.6 percent to last trade at 99.42 yen, on pace for its best daily performance in two months. The U.S. currency's rally was so strong that it pierced key resistance levels - the 55- and 100-day moving averages. The dollar's gains against the euro and the yen pushed the dollar index up 1 percent to 82.308, its largest daily increase since early July. A report showing U.S. jobless claims fell to their lowest in five and a half years and a U.S. manufacturing index which rose to its highest in two years also boosted the dollar. The Institute for Supply Management index of national factory activity topped expectations for July. The ISM sub-index of new orders climbed to its strongest in more than two years while employment expanded, boding well for the closely watched U.S. payrolls report due out on Friday. "Overall, this is a tentative signal that the labor market remains pretty healthy," said Avery Shenfeld, chief economist at CIBC World Markets in Toronto. Markets are expecting 185,000 new U.S. jobs in July and an unemployment rate of 7.5 percent, according to a Reuters poll . The array of upbeat U.S. data on Thursday came one day after the U.S. Federal Reserve said that the world's biggest economy was recovering but still needed support, which dashed some expectations that it would start winding down its own stimulus program as soon as September.
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