Euro holds huge gains; dollar looks for jobs

By Ian Chua

SYDNEY (Reuters) – An explosive rally in the euro took a breather early in Asia on Friday ahead of influential U.S. jobs data, but the single currency is set to stay bid after the European Central Bank signaled an interest rate hike as early as next month.

While the ECB had been expected to step up its anti-inflation rhetoric, nobody actually thought ECB President Jean-Claude Trichet would explicitly say an interest rate hike at the next meeting is possible.

“The market was unprepared for Trichet to lay the foundation for an April rate hike,” said David Watt, strategist at RBC Dominion Securities.

Euro interest rate swaps soared across the curve with the two-year rate hitting 2.30 percent, highs not seen since early 2009, as the market priced in prospects of an imminent rate hike.

The euro jumped to a near four-month highs of $1.3976 and last traded at $1.3959. Against the yen, the common currency hit four-month highs at 115.17 and last stood at 115.01.

Having taken out resistance around 114.01, the late January high that had capped the euro in February, the single currency now looked poised to test 115.68, the early October high, Watt added.

The euro jumped above 1.3000 Swiss francs, from around 1.2800 francs and rallied to 10-month highs against the New Zealand dollar.

“We see scope for rates to go up significantly further this year, beyond the hike now widely expected in April,” said Kenneth Wattret, analyst at BNP Paribas.

While that could be supportive of the euro in the near-term, there are worries that weaker peripheral euro zone countries will suffer from tighter policy, which will then pressure the single currency.

Strength in the euro saw the dollar hit fresh four-month lows against a basket of major currencies. The dollar index (.DXY: Quote, Profile, Research) reached 76.385 before edging back to 76.459.

But the dollar rose against the yen, hitting one-week highs at 82.51, after repeated tests at around 81.60 in the past few sessions failed to break new lows.

The dollar’s near-term direction hinges on U.S. non-farm payrolls data due later on Friday. Analysts polled by Reuters expect the report to show a rise of 185,000, following a tepid 36,000 increase previously.

“That will be good for the dollar and especially dollar/yen. Markets are currently priced for no rate hikes in the U.S. until 2013. I think that call will have start coming back in and that will be positive for the dollar,” a trader at a U.S. investment bank said.

(Editing by Wayne Cole)