* ECB unexpectedly cuts interest rates to 0.25 percent
* ECB’s Draghi sees prolonged period of low inflation
* U.S. economy accelerates in third quarter
* October U.S. payrolls report slated for Friday
* Dollar rallies to multi-week highs against euro, yen
NEW YORK, Nov 7 (Reuters) - The euro slid to a more than seven-week low against the dollar on Thursday after the European Central Bank shocked investors by cutting interest rates and said that policy will remain accommodative for as long as necessary.
Adding to dollar strength was data showing growth in the U.S. economy accelerated in the third quarter while jobless claims fell in the latest week, supporting the case for a cutback in stimulus by the Federal Reserve later this year.
The ECB on Thursday cut borrowing costs to a record low of 0.25 percent in response to a sharp drop in inflation. Although some in the market had expected a cut as early as this week, traders said most had been betting the ECB would wait until December.
At the central bank’s post-meeting press conference, ECB head Mario Draghi said the euro zone may see a prolonged period of low inflation and that the bank expects rates to remain at present or lower levels for an extended period.
“With the Fed’s easy money days seen increasingly numbered, the ECB’s more dovish and divergent outlook augurs meaningful euro depreciation over the coming weeks,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, D.C.
The euro tumbled 0.7 percent to $1.3422, having fallen as low as $1.3295, according to Reuters data, matching the low set on Sept. 16. Losses accelerated after it dropped below strong chart support at $1.3462 from a trendline drawn from lows hit in early July.
“The market had not priced in a cut. So the euro will head lower and we can see it move towards the $1.32 area,” said Alvin Tan, currency strategist at Societe Generale.
The euro zone common currency also dropped to a 10-month low against sterling and a one-month trough against the yen.
The dollar index, which measures the greenback versus a basket of currencies, rose to its highest since mid-September, at 81.460. It was last up 0.4 percent at 80.801.
The U.S. economy expanded at a 2.8 percent annual rate in the third quarter, the quickest pace since the third quarter of 2012, the Commerce Department said on Thursday. Economists had expected a growth rate of 2.0 percent.
Analysts said the euro could fall further against the dollar if Friday’s U.S. jobs report for October is on the strong side and suggests the economy weathered the partial government shutdown in the first half of that month.
A strong jobs report would be seen as making it more likely the Federal Reserve will scale back monetary stimulus soon, in contrast to the ECB’s accommodative stance.
The other side of that event risk is that a bad report will send the dollar lower.
“A dismal employment report may encourage the central bank to further delay its exit strategy, and the board may forgo the taper timeline laid out by (Fed) Chairman Ben Bernanke in order to promote a stronger recovery,” said David Song, Currency Analyst at DailyFX in New York.
Against the yen, the dollar rose to a near seven-week high at 99.41 yen before surrendering gains to trade at 97.87 yen, down 0.8 percent on the day and close to the session low.
Analysts noted heavy option-related selling interest between 99 and 100 yen. The sharp move lower also picked up after the dollar fell beneath 99 yen, which prompted some traders to cut long positions.