Dollar rises broadly after ECB, U.S. data

NEW YORK Thu Sep 5, 2013 4:12pm EDT

1 of 2. A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo August 2, 2011.

Credit: Reuters/Yuriko Nakao

NEW YORK (Reuters) - The dollar rose to a seven-week peak against the euro on Thursday after the head of the European Central Bank said its Governing Council expects key ECB interest rates to remain at present or lower levels for an extended period.

The dollar was also strong after solid U.S. economic data released on Thursday ahead of nonfarm payrolls data, due on Friday, that could firm up the case for a cut in Federal Reserve stimulus from this month.

Earlier, the ECB left its main interest rate unchanged at a record low of 0.50 percent as recent economic data has shown a nascent recovery taking hold in the euro zone.

"ECB President Draghi toed the line that relatively higher interest rates could threaten the recovery, and that the central bank remains 'prepared to act' should the conditions justify a response," said Christopher Vecchio, currency analyst at DailyFX in New York.

Payrolls processor ADP and Moody's Analytics said U.S. private employers added 176,000 jobs in August, nearly matching economists' expectations for the month.

"The ADP correlation to payrolls is moderate at best, but the psychological attachment is strong. The market is already expecting the quantitative easing train to slow in two weeks; today's ADP result offers modest reinforcement to that view," said Joseph Trevisani, chief market strategist at WorldWideMarkets in Woodcliff Lake, New Jersey.

A separate report on the U.S. services sector showed the employment component of the ISM services index jumped to a six-month high. The overall index showed the fastest pace of growth in almost eight years.

The dollar index .DXY was up 0.6 percent at 82.625, not far from a seven-week high of 82.671 touched earlier in the New York session. The euro was down 0.7 percent at $1.3119 after falling to a seven-week low of $1.3109.

The euro zone single currency failed to gain support from a recent run of encouraging economic data.

The dollar was also given broad support by a rise in the U.S. two-year debt yield, which hit a more-than two-year high, widening the currency's yield advantage.

Sterling was last down 0.2 percent at $1.5592 after the Bank of England announced no changes to interest rates or its bond-buying program and made no further statement on policy.

The main focus, however, is on the U.S. nonfarm payrolls report, due out on Friday.

If that data confirms a continued recovery in the job market, it will be seen as sufficient for the Federal Reserve to decide at its September 17-18 meeting to start reducing its bond-buying program.

Expectations that the Fed will be the first major central bank to hike rates have underpinned the dollar.

"After all the major central banks are done today the FX shift would firmly return to the U.S. dollar on Friday. There is a lot hinged on the nonfarm payrolls data," said Neil Jones, head of hedge fund FX sales at Mizuho Corporate Bank.

"If the number is around 200,000, the dollar will go higher. Our dollar forecasts for the next few months are quite upbeat as the Fed is going to taper this year."

The dollar tested the 100-yen level, marking a six-week peak for the currency pair at 100.19 on both yen weakness and broad dollar strength. The dollar was last up 0.4 percent at 100.13 yen.

Traders said the yen suffered as investors unwound safe-haven buying, spurred by concerns over a U.S. plan to attack Syria, while moving little after the Bank of Japan maintained policy as expected.

"It seems like the market is tentatively concluding that any military action may not last that long and its impact on the world economy will be limited. The market is coming back to business as usual," said Bart Wakabayashi, head of forex at State Street Global Markets in Tokyo.

(Reporting by Nick Olivari and Wanfeng Zhou; edting by Andrew Hay)

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