CURRENCIES: Euro Rallies To 2-year High As Hawkish View On ECB Dominates

U.S. dollar Index slumps 1.3% over the week

The euro strengthened on Friday to a two-year high against the dollar, extending its gains, a day after European Central Bank President Mario Draghi attempted to tamp down comments in late-June that traders interpreted as hawkish.

The euro rose to trade at $1.1680 on Friday, compared with $1.1632 late Thursday in New York, the highest settlement since Jan. 15, 2015, according to WSJ Market Data Group. Over the week, the euro rose 1.8% against the dollar and has rallied 11% year to date.

The currency moved above $1.16 for the first time since May 2016 on Thursday, after a news conference with ECB President Mario Draghi.

Draghi said the central bank would continue its EUR60 billion a month asset-buying program through December as planned, and that policy makers will discuss the quantitative-easing program this "autumn." He didn't specify if that meant at its September meeting. His Thursday statements, which sent the euro on its current tear, came after the central-bank boss sparked a so-called mini-taper tantrum on June 27 in Sintra, Portugal when he hinted that the ECB may be inclined to scale back its accommodative policies amid signs the European economy was perking up.

On Thursday, however, Draghi emphasized that stubbornly low inflation remains the ECB main concern.

Traders ultimately sent the euro higher on the view that no matter what Draghi said, the ECB will begin tapering those purchases in 2018, and eventually commence a wind down.

"The euro rally is more to do with the general dollar weakness than the euro strength," speculated Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.

"The dollar has been under pressure as the latest political headlines suggest the turmoil within the administration is not abating," Esiner said.

Read:Nobody told the euro that Mario Draghi was dovish (http://www.marketwatch.com/story/nobody-told-the-euro-that-mario-draghi-was-dovish-2017-07-20)

The latest burst of strength for the euro may not get Draghi too panicked, said Jennifer McKeown, chief European economist at Capitol Economics.

"At just above $1.16 at the time of writing, the euro remains well below its long-run average against the U.S. dollar of $1.21 and even further below its average in trade-weighted terms," she said in a note Friday.

"And since it seems keen to taper its QE program (not least because it is running out of assets to buy), we suspect that it would take a further rise to $1.20 or more before year-end to prompt the Bank to abandon its plans," said McKeown.

The key factor preventing a further euro rise will be U.S. policy tightening, she said, adding that they expect the Federal Reserve to raise interest rates in December and then four times in 2018.

The Fed will move into focus next week with a two-day meeting starting July 25, though there are scant expectations for an interest-rate change.

The ICE U.S. Dollar Index , which compares the greenback against a half-dozen other currencies, fell 0.5% to 93.85, it's lowest level in more than a year. The index finished the week 1.4% lower and is down 8.2% since the start of the year, according to FactSet data.

Elsewhere, the British pound remained below the $1.30 level, but was slightly firmer at $1.2999 on Friday, up 0.2% from $1.2973 in late trading on Thursday.

Against the yen , the dollar traded at Yen111.07, down 0.8% from Yen111.91 late Thursday.

In other currency pairs, Canadian dollar strengthened against the buck after Canadian retail sales and inflation data came in stronger than expected. On Friday, greenback bought C$1.2538, down from C$1.2591 late Thursday. Over the week, the loonie gained 0.8% against its southern counterpart and is up 6.7% year to date.

Some analysts suggested that the rally in the Canadian dollar could be threatened by the housing market.

(END) Dow Jones Newswires

July 21, 2017 15:22 ET (19:22 GMT)