FOREX-Euro losses linger after central bank's inflation pledge

Thu Apr 3, 2014 2:55pm EDT

Related Topics

* Euro off 0.36 percent against dollar
    * European policymakers more dovish than expected,
strategist says
    * Yen sets fresh 10-week low vs dollar
    * U.S. nonfarm payrolls key to further dollar gains

 (Adds comments, background; updates prices)
    By Michael Connor
    NEW YORK, April 3 (Reuters) - The euro dropped on Thursday
after the European Central Bank kept interest rates on hold and
pledged to use unconventional monetary measures if needed to
battle low inflation in the euro zone.
    The decline of the common currency shared by 18 countries
helped extend a broad rally in the U.S. dollar that traders say
may be tested on Friday, when U.S. nonfarm payrolls data for
March is scheduled to be released in Washington.
    The euro had flirted in recent weeks with the key
$1.40 level, not seen since 2011, but on Thursday dipped as low
as $1.3736 during a news conference by ECB President Mario
Draghi and later declined just below $1.37.
    The euro last traded off 0.36 percent against the dollar at
$1.3716, and was down 0.18 percent against the pound 
and 0.33 percent against the Japanese yen.
    "The ECB is being slightly more dovish than the market
expected," said Kathy Lien, managing director at BK Asset
Management in New York. "The main takeaway is that the council
is considering unusual techniques, and that's negative for
euro/dollar."
    At its April meeting in Frankfurt, the ECB opened the door
to using quantitative easing and other monetary policies meant
to rescue the euro zone from worringly slow inflation.
 
    Euro zone annual inflation ticked down to 0.5 percent in
March, its lowest since 2009 when the economy was deep in
recession, and its sixth month below 1 percent in what Draghi
has described as "the danger zone."
    The euro's decline helped the dollar, with the U.S. dollar
index up 0.33 percent to 80.83.
    The dollar was also trading higher against the yen at
103.96 yen after touching a high of 104.11, a level last seen on
Jan. 23.
    The dollar's steady march higher against the yen has been
the main move of the past two weeks on major currency markets,
awakening hopes that the greenback may finally be set to deliver
on the break higher, as predicted by many banks in January.
    The dollar has gained almost 3 percent against the yen since
March 19, when U.S. Federal Reserve chief Janet Yellen told
markets that the Fed might raise interest rates next spring. 
    U.S. jobs data on Friday may be the decisive factor for any
further gains. 
    "There is a lot of resistance (to more dollar gains) around
104 yen and we may not break that today," said a dealer with one
bank in London. "The key to any move higher will be nonfarm
payrolls tomorrow."
    U.S. nonfarm payrolls are expected to have increased by
200,000 in March, the largest gain in four months, according to
a Reuters poll of economists. 
    "A jobs survey that suggests the U.S. economy is in
bounce-back mode after a lull would stand to give the dollar a
meaningful lift," Western Union Business Solutions currency
strategist Joe Manimbo said in a commentary.
         
    'LOW-FLATION'
    International Monetary Fund Managing Director Christine
Lagarde on Wednesday had called on the ECB to ease monetary
policy, warning "low-flation" in advanced economies risked
undercutting an already sluggish global recovery.
 
    But U.S. data has generally improved after a dip in fortunes
in recent months, now largely put down to the harsh winter
weather. Worries over China and Ukraine that prompted investors
to seek the relative security of the yen have also slipped, at
least momentarily, off the agenda.
    A Reuters poll of over 60 foreign exchange strategists taken
this week predicted the euro would fall to $1.37 in one month,
$1.33 in six months and $1.29 in a year. 
    Steen Jacobsen, chief investment officer with leading retail
FX platform Saxobank, sees the euro sinking to $1.25 this year
on the back of more aggressive action later in the year to ease
monetary conditions.
    "You may argue that there is no real reason flows-wise for
the euro to weaken, but I think for the lobbies and
policymakers, $1.40 is a line they cannot cross," he said. "I
think it will get there and that will lead to action."

 (Additional reporting by Patrick Graham in London; editing by
Chizu Nomiyama and G Crosse)
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