Euro dips after US jobs data aids dollar rebound

London

THE euro dipped on Monday (Feb 7) after a surge last week that followed the hawkish turn from the European Central Bank (ECB), as traders turned to the US dollar, betting the jump in US jobs created in January could lead to faster Federal Reserve rate hikes.

The European common currency dropped 0.2 per cent to as low as US$1.1425, having hit its highest since mid-January on Friday. Those gains had been driven by a hawkish turn from the ECB, which led markets to bring forward the likely timing of eurozone rate rises and sent bond yields sharply higher.

"ECB president Christine Lagarde's clear signal that the door has opened for rate hikes later this year is a real game changer for the foreign exchange market," said MUFG analyst Lee Hardman.

"Over the past year the EUR has underperformed on the back of expectations that the ECB will maintain loose policy while the Bank of England and Fed tightens," he said, predicting that market participants would now to pare back short euro funding positions.

ECB policymaker Martins Kazaks pushed back against market expectations for a rate hike as soon as July in an interview with Reuters. He said the bank could end its stimulus programme earlier than planned but it was unlikely to raise its main interest rate in July.

The greenback has found support, helped by US Treasury yields that rose after far better-than-expected jobs data on Friday.

Markets have now priced in a one-in-three chance the Fed might hike by a full 50 basis points in March, and a reasonable chance rates will reach 1.5 per cent by year end.

These expectations could be bolstered by the US consumer price index due Thursday.

The dollar index was last unchanged on the day at 95.444 but off the lows of 95.136 touched last week before the labour market numbers. US two-year yields were holding firm after gaining sharply in the wake of the jobs data, and briefly touched a new a two-year high of 1.33 per cent.

The yen was a little stronger at 115.14 per dollar, while sterling climbed 0.1 per cent to US$1.3537, both in the middle of their recent ranges. REUTERS