Euro at 10-month high against dollar ahead of ECB meeting

SINGAPORE LONDON The euro was at a 10 month high against the dollar on Thursday, ahead of a European Central Bank meeting on Thursday. Markets expect a half-percentage point rate increase, a day after the U.S. Federal Reserve slowed the pace of its rises to 25 basis points.

The Fed also said it had turned a corner in the fight against inflation, the first explicit acknowledgment that price increases are slowing, underpinning market expectations that the end of the central bank's rate-rise campaign is near and cuts could follow.

The dollar's most dramatic overnight dive came after Fed Chair Jerome Powell told a post meeting news conference that the disinflation process has started, but he also signalled that interest rates would continue to rise and that cuts were not in the offing.

Ray Attrill, head of FX strategy at National Australia Bank NAB Powell said that it was a relief that there was nothing there that really challenged the market's view, and that it didn't dissuade the market from saying some time might be six months, rather than two years. The Bank of England meets on Thursday with its rate decision due at 1200 GMT before the European Central Bank's 1315 GMT. Markets expect a half-point increase from the British central bank.

The pound was down 0.47 per cent on Wednesday, held at $1.236, and the dollar fell against the Japanese yen, dropping to as low as 128.07, its lowest in two weeks.

The euro was at $1.1034 in Asian trading on Thursday, its highest since April 4, having jumped 1.2 per cent on Wednesday. It was last at $1.100, flat on the day, as the focus turned to the ECB meeting.

Chris Turner, head of markets at ING, said a 50 bp hike is widely expected as a hawkish message that will support market pricing of a further 75 -- 100 bp of tightening into the summer.

A narrowing in rate differentials is going to be a bigger driver of EURUSD this year and should carry it to the $1.15 area in the second quarter.

Turner said that the derivatives market shows the smallest premium in dollar rates over euro equivalents since late 2021.

The Australian dollar was up 1.2 per cent on Wednesday and hit a new eight-month high of $0.7158 in early Asia trade Thursday, and the Swiss franc has rallied to its strongest since late 2021 on Thursday, as well as the Swiss franc which fell to its strongest since late 2021 on Thursday.

The U.S. dollar index fell more than 1 per cent to a new nine-month low of 100.80 on Wednesday, and traded just above that on Thursday, against a basket of currencies.

Friday's U.S. nonfarm payrolls report will be the next test of the Fed's fight against inflation, though official data showed on Wednesday that job openings had unexpectedly risen in December, pointing to a still tight labour market.