Dollar leaps vs euro after central bank heads speak

[HenryTo]

As always, the ECB likes to surprise everyone:
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Thursday November 3, 10:07 PM
FOREX-Dollar leaps vs euro after central bank heads speak

By Kevin Plumberg

NEW YORK, Nov 3 (Reuters) - The dollar surged against the euro on Thursday after comments by Federal Reserve chairman Alan Greenspan came off sounding more hawkish than those of his counterpart at the European Central Bank.

Interest rate markets had begun to price in the possibility that the ECB would tighten rates in December for the first time in 2-1/2 years. But on Thursday the euro zone central bank held rates steady at a policy meeting and gave no indication a change is in the offing.

"The market was getting ahead of itself regarding the ECB and (ECB President Jean-Claude) Trichet's comments today were not as hawkish as many expected," said Marc Chandler, chief global currency strategist with Brown Brothers Harriman.

By 2132 GMT, the euro had fallen over 1 percent against the dollar to $1.1944. Automatic sell orders were triggered at around $1.1980, accelerating the decline.

The dollar overcame options-related defense at 117 yen and 117.25 yen, rising a half percent on the day to a 25-month high of 117.39 yen before retracing to 117.15 yen.

The Fed chief made no specific monetary policy reference in what likely were his last remarks to Congress before he retires. But he repeated a warning on long-term inflation, echoing concern cited by Fed policy-makers during the 16-month-long rate-rising campaign.

That contrasted with comments from Trichet who maintained that euro zone rates were still appropriate.

"While Trichet indicated that he is prepared to change rates at any time, there was very little to suggest that this was anything more than the usual boiler plate central bank speak," said Chandler.

Against the Swiss franc, the dollar jumped more than 1 percent to 1.2927 francs. Sterling was down a third of a percent at $1.7700.

PAYROLLS VIGIL

The dollar has firmed this week, particularly against the yen, thanks to a combination of relatively contained U.S. core inflation, solid growth data and prospects for higher interest rates.

"We continue to expect a peak in the fed funds rate at 4.50 percent by early next year, and expect the dollar to remain well bid in the near term," said Eric Darwell, currency strategist with Citigroup.

The latest battery of U.S. economic data was also positive for the dollar.

A stronger-than-expected October surge in the mammoth U.S. services sector from a post-hurricane slide and higher-than-forecast productivity figures for the third quarter, released on Thursday, bolstered the dollar.

The Institute for Supply Management's services index rose to 60.0 in October from 53.3 in September, beating Wall Street's median forecasts for an index of 57.0.

"The foreign exchange market is focusing more on prospects for solid U.S. growth and for at least another 50 basis points of rate hikes from the Fed and these are both dollar positives going forward," said Ronald Simpson, managing director of global currency analysis with Action Economics.

Traders will shift their attention to the October U.S. employment report due on Friday. Economists polled by Reuters expect payrolls growth of 100,000 jobs compared to a decline of 35,000 jobs in September.