Euro faces payrolls after Draghi fueled biggest gain since 2009

The euro clung to its biggest jump since 2009 as investors awaited a U.S. payrolls report that will be a key input for the Federal Reserve as it considers tightening policy this month for the first time in almost a decade.

The single currency surged 3.1 percent versus the dollar Thursday as the European Central Bank's decision to boost stimulus 360 billion euros (S$550 billion) and cut the deposit rate fell short of some analysts' forecasts. Two-thirds of economists in a Bloomberg survey had predicted an increase in the pace of purchases.

"What the ECB delivered wasn't even half of what markets expected, providing an opportune time for those looking to unwind their euro short positions," said Daisuke Karakama, chief market economist at Mizuho Bank Ltd. in Tokyo. "For Draghi, it's probably alright because the euro is in an environment to drift lower anyway as the Fed seeks to raise rates." The common currency was little changed at US$1.0939 as of 2:37 pm in Tokyo from Thursday, when it soared to US$1.0981, the strongest since Nov 3. It bought 134 yen after jumping 2.5 per cent to 134.13 in New York.

Intercontinental Exchange's US Dollar Index, which tracks the greenback against six peers, rallied 0.3 per cent to 97.887. It tumbled 2.4 per cent on Thursday, the biggest decline since March 2009, after Fed chair Janet Yellen emphasised the gradual path of US interest-rate increases.

Gains by the US currency may be limited because those who were buying the dollar against the euro probably incurred losses after excessive expectations for ECB easing proved wrong, according to Yuji Kameoka, chief currency strategist at Daiwa Securities in Tokyo.

"They may be cautious about buying dollars," he said. "Still, the dollar is underpinned going into the Fed meeting as long as the jobs data are within expectations." Thursday's decision disappointed euro bears who increased bets last month after ECB President Mario Draghi promised to "do what we must" to spur lackluster inflation. Hedge funds and other large speculators increased net wagers on a weaker euro to 175,484 contracts in the week to Nov 24, the most since May, according to data from the Commodity Futures Trading Commission.

The Fed is moving toward raising rates with Yellen signaling in congressional testimony Thursday the economic conditions necessary for an interest-rate increase have been met. The jobs report on Friday will probably show American companies added 200,000 workers in November, compared with 271,000 the month before, according to the median estimate of analysts surveyed by Bloomberg.

Futures indicate a 76 per cent chance the Fed will raise its benchmark rate at the Dec 15-16 meeting, data compiled by Bloomberg show. The calculation is based on the assumption that the effective fed funds rate will average 0.375 per cent after the first increase, compared with the current range of zero to 0.25 per cent.

"The euro remains an attractive short versus the dollar," said Todd Elmer, a Singapore-based strategist at Citigroup. "While the ECB may have disappointed at its meeting, there is still likely to be widening in terms of policy divergence between the US and Europe. Once we work through this position flush-out, I'd expect the euro to head lower again."

BLOOMBERG