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CURRENCIES : Euro Rallies To 3-week High As Traders Brace For ECB Tightening

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06/07/2018 | 06:15am EST

By Sara Sjolin, MarketWatch

Dollar index falls for third straight session

The euro climbed to a three-week peak against the dollar on Thursday, continuing its recent rebound. That rise was amplified by signals from policy makers that the European Central Bank is ready to focus on winding down its massive stimulus program.

The U.S. dollar continued to lose ground against its main rivals and faced another down day, with traders seen as keen to bet against the buck versus other major currencies.

What are currencies doing?

The ICE U.S. Dollar Index dropped 0.4% to 93.311. That was around its lowest level since mid-May and set the greenback on track for its third losing session in a row, according to FactSet data.

The euro jumped to $1.1827 from $1.1775 late Wednesday in New York. The shared currency is now headed for a 2.1% weekly advance, which mark its best week since May 2017.

The pound climbed to $1.3464 from $1.3412 late Wednesday, also trading around its highest level against the greenback since mid-May.

The yen gained ground against the greenback, with the dollar buying Yen109.93 compared with Yen110.19 late on Wednesday.

What is driving the market?

Traders continued to pile into the euro, on rising expectations that the ECB will reveal more about its plans for exiting its aggressive quantitative-easing program at its meeting next week. Some analysts believe the central bank may be prepared to wrap up its EUR30 billion-a-month bond-buying program altogether this year.

Investors had expected the central bank to wait until its July meeting to begin making such decisions. But hawkish comments from ECB Chief Economist Peter Praet and policy maker Jens Weidmann indicated that they are ready to make their call next Thursday.

The market is now pricing in an about 90% chance of rate rise in July 2019 (https://www.reuters.com/article/us-eurozone-money-markets/money-markets-almost-fully-pricing-in-ecb-rate-hike-by-july-2019-idUSKCN1J20WK), compared with last week, when a hike in October 2019 was considered the most likely outcome, according to Reuters.

Meanwhile, the pound shook off persistent uncertainty over Brexit, as analysts said sterling's rally was more a reflection of dollar weakness.

A "backstop" plan outlining a temporary customs arrangement after the U.K.'s withdrawal from the European Union was expected to be released early Thursday. But that release seemed to be delayed after the plan -- which aims to avoid a "hard" Irish border -- met resistance from Brexit Secretary David Davis.

U.K. Prime Minister Theresa May is in meetings to try to resolve the concerns of senior ministers, the BBC reported (https://www.bbc.co.uk/news/uk-politics-44391539), but there is speculation that Davis may decide to resign.

What are strategists saying?

-- "The euro has been a one of the biggest movers in the FX space this week, as rising expectations of a hawkish shift from the ECB next month drive a move into the single currency," said Joshua Mahony, market analyst at IG.

"[With ECB comments] pointing towards underlying strength and rising inflation, there is a growing feeling that the ECB could lay out a pathway to the end of QE at their forthcoming meeting in a weeks' time," Mahony said in a note.

-- In relation to the pound, Craig Erlam, senior market analyst at Oanda, said Thursday's move was more a reflection of broad weakness in the dollar than of strength in sterling.

"The gains in GBPUSD almost perfectly mirror the losses in the U.S. dollar index this morning, which suggests it's less of a sterling-driven move. I think it's also worth noting that the gains we're seeing in the pair are only a minor corrective move in a much larger selloff over the last couple of months," Erlam said in emailed comments.

"With so much uncertainty over Brexit at such a crucial stage, sterling may struggle to build on recent gains in any significant way," he said in emailed comments.

What could move the market later?

The dollar could be whipped around as economic data comes in throughout the day. A reading on weekly jobless claims is due at 8:30 a.m. Eastern Time, while first-quarter data on quarterly services are scheduled for release at 10 a.m.

Household debt numbers for the first quarter are expected at noon, and an update on consumer credit for April is slated for 3 p.m.

There are no Federal Reserve speakers as the central bank is in its blackout period ahead of its meeting next week.

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