* Euro, GBP belted after central banks surprise with
* Leaves Fed alone with tapering plans, to benefit of USD
* Dollar index within reach of 3-year high
* Markets turn their attention to US payrolls due later
By Wayne Cole and Hideyuki Sano
SYDNEY/TOKYO, July 5 The dollar was broadly
higher on Friday after Europe's two biggest central banks
blindsided markets with decidedly dovish policy guidance, as
attention turned to a crucial U.S. jobs report that could either
bolster or weaken the case for an imminent reduction of the
Federal Reserve's stimulus.
The dollar could extend its gains, possibly to test its near
three-year high against a basket of currencies hit in May, 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 dollar index made a swift turnaround, climbing from to
as high as 83.906 , the highest since late May,
having risen 4.2 percent from its low hit in June.
The index is within reach of its May 23 peak of 84.498, a
break of which could add fresh momentum to the currency.
The euro fetched $1.2903, down 0.15 percent 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 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.
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
"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
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 0.2 percent to 100.28 yen
, ticking up near Wednesday's one-month high of 100.86.
Still, despite the latest firmness in the dollar, the option
market is showing strong demand for dollar/yen puts, with risk
reversal spreads still near the widest level in favour of dollar
puts in two weeks.
"This is likely a result of speculators unwinding their bets
against the yen," said Osamu Takashima, chief FX strategist at
Citigroup Global Markets Japan.
"That seems to suggest that, if you look at two to three
week terms, speculators will have fresh capacity to sell the
yen," he said, adding that Japan's upper house election on July
21 could be a trigger for yen-selling.
Prime Minister Shinzo Abe and his coalition partner are
expected to score a hefty victory, likely ending years of a hung
parliament in Japan.