By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) -The euro surged to a three-week high against the U.S. dollar on Thursday after comments from European Central Bank President Christine Lagarde fuelled expectations of faster policy tightening, as she focused on the prospect of euro zone inflation overshooting.
She also did not repeat previous comments that interest rates in the region were not likely to rise this year.
The single European currency rose as high as $1.1452, the highest since Jan. 14, and was last up 1.2% at $1.1441. The euro was on track for its largest daily percentage gain since early December 2020.
Lagarde acknowledged on Thursday that euro zone inflation was running hotter than expected, with risks tilted to the upside. She also said the ECB, which left policy rates unchanged at Thursday's meeting, would not rush into new moves.
When asked if the ECB was "very unlikely" to raise rates this year, Lagarde said it would assess conditions very carefully and be "data-dependent."
Euro zone money markets are currently pricing an 80% chance of a 10 basis-point hike in June and an almost 100% chance of 40 bps of hikes by year-end, from a 90% chance of 30 bps hikes before Lagarde's press conference. [IRPR]
"President Lagarde adopted a dramatically more hawkish tone in the press conference than on any previous occasion," wrote Andrew Kenningham, chief Europe economist, at Capital Economics.
"Most significantly, she pointedly refused to repeat her view that rate hikes this year are 'very unlikely,' or even 'unlikely.' In effect, she was telling investors that she now thinks a rate hike this year is likely," he added.
Sterling climbed to a two-year peak versus the euro after the Bank of England raised interest rates to 0.5% on Thursday, with nearly half of its policymakers pushing for a bigger increase to contain surging inflation.
The British pound later fell versus the euro after Lagarde's hawkish turn. The euro was last up 0.1% at 84.09 pence. Against the dollar, sterling rose 0.2% to $1.3598.
The dollar index, with the euro as the largest component, dropped 0.7% to 95.311, on course for its biggest daily loss since May 2021.
The Federal Reserve remains on course to lift interest rates by a quarter of a percentage point in March, with about five hikes seen this year, according to Refinitiv data.
Fed funds futures have also priced in a roughly 20% chance of 50 basis-point hike at the March meeting.
The January non-farm payrolls report will be released on Friday, although the data won't be as crucial for the Fed as in the past, as the focus is more on inflation rather than full employment.
"There also is a strong likelihood that Omicron dented employment last month measurably, as was reflected in the ADP (private payrolls) report and other January data," said Action Economics in its blog.
U.S. nonfarm payrolls are forecast to show a gain of 150,000 jobs for January, down from 199,000 in December, with the unemployment rate holding steady at 3.9%, according to a Reuters poll.
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Currency bid prices at 2:56PM (1956 GMT)
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
Previous Change
Session
Dollar index 95.3840 96.0280 -0.66% -0.292% +96.2570 +95.2320
Euro/Dollar $1.1431 $1.1304 +1.12% +0.55% +$1.1452 +$1.1265
Dollar/Yen 114.9300 114.4200 +0.45% -0.16% +114.9700 +114.3300
Euro/Yen 131.37 129.35 +1.56% +0.81% +131.5400 +129.2000
Dollar/Swiss 0.9206 0.9190 +0.18% +0.93% +0.9235 +0.9178
Sterling/Dollar $1.3585 $1.3571 +0.11% +0.45% +$1.3628 +$1.3540
Dollar/Canadian 1.2679 1.2668 +0.11% +0.30% +1.2715 +1.2658
Aussie/Dollar $0.7130 $0.7135 -0.08% -1.93% +$0.7168 +$0.7111
Euro/Swiss 1.0524 1.0387 +1.32% +1.49% +1.0542 +1.0383
Euro/Sterling 0.8412 0.8327 +1.02% +0.14% +0.8416 +0.8286
NZ $0.6654 $0.6634 +0.31% -2.78% +$0.6681 +$0.6610
Dollar/Dollar
Dollar/Norway 8.7260 8.7980 -0.82% -0.95% +8.8445 +8.7085
Euro/Norway 9.9766 9.9472 +0.30% -0.36% +9.9974 +9.9309
Dollar/Sweden 9.1083 9.1979 +0.13% +1.00% +9.2263 +9.0849
Euro/Sweden 10.4122 10.3984 +0.13% +1.74% +10.4295 +10.3668