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Euro hits 2.5 year high on US dollar

Friday, March 07 12:32:04

The euro raced to a 2-1/2 year high against the dollar today as short term money market rates rose on signs that the European Central Bank's balance sheet was contracting at a time when other major central banks were still expanding theirs.

More gains are likely if a key U.S. jobs report reflects the soft patch being felt by the world's largest economy.

The dollar slipped from a five-week high against the yen with its near-term fortunes hinging on the non-farm payrolls report, due at 1330 GMT. The data is likely to show job growth picked up enough in February to encourage the Federal Reserve to continue scaling back stimulus.

A Reuters poll of economists found employers were expected to have added 149,000 workers to their payrolls last month. But analysts said investors may be bracing for a weaker reading following the soft ADP private sector jobs report and ISM services sector survey released earlier this week.

The euro hit a 2-1/2 year high of $1.3915 in European trade, its highest since October 2011. The euro has made broad based gains after the ECB on Thursday decided to stand pat on policy and held off from fresh monetary stimulus.

"The ECB was quite disappointing to a lot of euro bears," said Yujiro Gato, currency strategist at Nomura, London. "We do not rule out a move towards $1.40 by the euro in the coming weeks given the ECB is unlikely to ease policy anytime soon."

The euro's gains accelerated on Friday after data from the ECB showed banks were set to repay a big chunk of its emergency 3-year loans next week. That repayment to the ECB shrinks its balance sheet size at a time when both the Federal Reserve and the Bank of Japan are expanding theirs by buying bonds.

The repayment of loans leads to a drop in excess liquidity, a factor which saw money market rates rise and boost the euro's allure.

Overall, investors are turning increasingly bullish about the euro after President Mario Draghi told a news conference that economic conditions in the region did not require a shift in monetary policy.

He also clarified that the euro's rise has only reduced inflation by 0.4 percentage points, comments which analysts said will likely to see more upside for the currency. (Reuters)