CURRENCIES: Euro Sits At 2-year High As Hawkish View On ECB Dominates

By Barbara Kollmeyer and Anora Mahmudova, MarketWatchFeaturesDow Jones Newswires

U.S. dollar Index on course for weekly slump

The euro strengthened further on Friday, hovering at a two-year high against the dollar even as European Central Bank President Mario Draghi struck a dovish tone about monetary policy during the previous session.

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The euro tapped a high of $1.1679 on Friday before pulling back to $1.1640. That compares with $1.1632 late Thursday in New York, the highest settlement since Jan. 15, 2015, according to WSJ Market Data Group.

The currency moved above $1.16 for the first time since May 2016 on Thursday, after traders zeroed in on a press conference with ECB President Mario Draghi. That followed the ECB's statement that it left interest rates unchanged and that it will continue buying EUR60 billion a month in bonds and other assets.

Draghi said the central bank would continue its bond-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.

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 will wind them down altogether.

Read:Nobody told the euro that Mario Draghi was dovish (

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 hike 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, was down 0.12% to 94.19, and was heading for a weekly fall of 1%, according to FactSet.

Elsewhere, the British pound remained below the $1.30 level, but was slightly firmer at $1.2980 from $1.2973 in late trading on Thursday.

Against the yen , the dollar traded at Yen111.32, down from Yen111.91 seen late Thursday.

In other currencies, Canadian dollar strengthened against the dollar after Canadian retail sales and inflation data came in stronger than expected. On Friday, the dollar bought C$1.2565, down from C$1.2591 late Thursday. Over the week, the loonie gained 0.6% against its southern counterpart and is up 6.5% year to date.

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

"With today's data adding to the momentum behind it, a Canadian dollar move upward through another set of key technical resistance levels looks increasingly likely -- but we remain convinced that the loonie's Icarus-like rise is getting too close to the sun. Should housing market weakness slow spending in the coming months, the loonie's wings could melt," said Karl Schamotta, director of global product & market strategy at Cambridge Global Payments.

(END) Dow Jones Newswires

July 21, 2017 10:00 ET (14:00 GMT)