Euro drops on ECB's low-rate policy, dollar rallies
* Draghi says euro zone growth risks tilted to the downside
* U.S. jobless claims drop to 5-1/2-year low
* U.S. ISM index rises to two-year high
* Dollar/yen up more than 1 percent
The euro fell against the dollar on Thursday, on track for its weakest day in three weeks, after European Central Bank President Mario Draghi said interest rates in the euro zone will remain low for an extended period.
In contrast, the dollar rose across the board, bolstered by U.S. data on jobless claims and manufacturing that showed the world's largest economy was recovering steadily.
Draghi told a press briefing after the ECB left rates unchanged that risks to growth in the region are tilted to the downside, warranting a loose monetary policy.
"The positive U.S. claims data contrasts to the cautious tone carried by Draghi and is forcing a widening in the yield gap between comparable benchmark bonds," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co LLC in New York. "The euro zone is several years behind the U.S. in terms of recovery and the dynamics of the upturn are built on a different foundation."
The yield differential between U.S. 10-year bonds and German benchmark bunds has expanded in favor of the dollar to its widest in two weeks, lending support to the greenback.
The euro slid to $1.3196 after Draghi's statement, the lowest in about a week, and was last at $1.3234, down 0.5 percent, its largest daily percentage fall since July 9.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, however, said he does not expect further easing from the ECB, since the euro zone's economic performance so far was in line with the ECB's forecast. "The bar is high to additional easing," Chandler said.
The dollar, meanwhile, was in demand, with the greenback rising 1.4 percent versus the yen. It was last at 99.20 yen and on pace for its best daily performance in two months.
The U.S. currency's rally was so strong that it pierced key resistance levels - the 55- and 100-day moving averages.
The dollar's gains against the euro and the yen pushed the dollar index up 0.95 percent to 82.226, its largest daily increase since early July.
A report showing U.S. jobless claims fell to their lowest in five and a half years and a U.S. manufacturing index which rose to its highest in two years also boosted the dollar. Initial claims for state unemployment benefits dropped 19,000 to a seasonally adjusted 326,000, the lowest since January 2008, the Labor Department said. Economists polled by Reuters had expected a rise to 345,000.
"Overall, this is a tentative signal that the labor market remains pretty healthy," said Avery Shenfeld, chief economist at CIBC World Markets in Toronto. The Institute for Supply Management index of national factory activity rose to 55.4 in July from 50.9 in June, topping expectations for 52. It was the highest reading since June 2011.
The ISM sub-index of new orders climbed to its strongest in more than two years, jumping to 58.3 from 51.9, while employment expanded to 54.4 from 48.7, boding well for the closely watched U.S. payrolls report due out on Friday.
Markets are expecting 185,000 new U.S. jobs in July and an unemployment rate of 7.5 percent, according to a Reuters poll.