Euro spikes, then drops, after hawkish ECB

© Reuters. FILE PHOTO: U.S. Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Karen Brettell

NEW YORK (Reuters) - The euro fell on Thursday as investors took profits from a brief surge in the currency after European Central Bank President Christine Lagarde said more interest rate hikes are needed to tame inflation.

The dollar was also boosted by worsening risk appetite as stocks fell.

The ECB raised interest rates for the fourth time in a row, although by less than at its last two meetings, pledged further hikes and laid out plans to drain cash from the financial system as part of its fight against runaway inflation.

Lagarde said that upside inflation risks remain, which necessitates more tightening.

“The outlook for inflation is rather hawkish for the ECB, whereas here in the U.S. the rhetoric is that they are going to keep raising until they win the fight against inflation, but I think traders are becoming more convinced that the Fed is near the end of tightening,” said Edward Moya, senior market analyst at OANDA in New York.

The greenback weakened on Wednesday even after Fed Chair Jerome Powell adopted a hawkish tone on the need for more tightening even as the economy slips toward a possible recession.

"Lagarde was more hawkish than Powell yesterday," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

Thursday's moves in the euro/dollar were likely "buy the rumor, sell the fact" around the ECB meeting, with the dollar also benefiting from the risk-off sentiment "that was prevailing before the ECB meeting," Chandler said.

The euro reached $1.0737, the highest since June 9, before falling back to $1.0643, down 0.36% on the day. The dollar index against a basket of currencies was up 0.75% on the day at 104.42.

The greenback briefly pared gains after data on Thursday showed that U.S. retail sales fell more than expected in November, while the labor market remains tight, with the number of Americans filing for unemployment benefits declining last week.

A separate report showed that manufacturing activity in the U.S. mid-Atlantic region contracted for a fourth straight month in December, but factory operators reported a brighter outlook and said inflation pressures were easing notably.

Sterling was lower on the day after the Bank of England raised its key interest rate to 3.5% from 3% and indicated that more hikes were likely.

The pound was last down 1.75% at $1.2208.

The Norwegian krone was lower on the day after Norway's central bank raised its benchmark interest rate by 25 basis points to a 13-year high of 2.75% on Thursday, as expected by economists, and said it will "most likely" hike again in the first quarter of 2023 as inflation remains above its target.

The dollar gained 1.22% against the Norwegian currency to 9.8460.

The Swiss franc was also lower on the day after Swiss National Bank Chairman Thomas Jordan said it was too early to "sound the all-clear" on high inflation after the central bank hiked interest rates again on Thursday and hinted further increases were still possible.

The SNB raised its policy interest rate by 50 basis points to 1% - the central bank's third hike this year as it stepped up its campaign to dampen the rise in prices.

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Currency bid prices at 11:15AM (1615 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 104.4200 103.6600 +0.75% 9.154% +104.5400 +103.5300

Euro/Dollar $1.0643 $1.0683 -0.36% -6.36% +$1.0737 +$1.0605

Dollar/Yen 137.7150 135.4800 +1.66% +19.64% +137.7400 +135.2400

Euro/Yen 146.58 144.68 +1.31% +12.48% +146.7200 +144.3100

Dollar/Swiss 0.9290 0.9244 +0.47% +1.82% +0.9303 +0.9232

Sterling/Dollar $1.2208 $1.2428 -1.75% -9.72% +$1.2426 +$1.2210

Dollar/Canadian 1.3632 1.3543 +0.66% +7.82% +1.3650 +1.3541

Aussie/Dollar $0.6707 $0.6864 -2.27% -7.72% +$0.6870 +$0.6708

Euro/Swiss 0.9886 0.9874 +0.12% -4.66% +0.9916 +0.9840

Euro/Sterling 0.8715 0.8594 +1.41% +3.75% +0.8723 +0.8592

NZ $0.6349 $0.6460 -1.70% -7.23% +$0.6463 +$0.6350

Dollar/Dollar

Dollar/Norway 9.8460 9.7280 +1.22% +11.78% +9.8690 +9.7465

Euro/Norway 10.4842 10.3710 +1.09% +4.71% +10.5011 +10.3783

Dollar/Sweden 10.3222 10.1531 +1.22% +14.46% +10.3364 +10.1599

Euro/Sweden 10.9843 10.8520 +1.22% +7.33% +10.9893 +10.8532