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Dollar Extends Slide vs. Euro on Trichet's Comments

The euro rose against the dollar and the yen on Thursday after the European Central Bank left interest rates on hold but President Jean-Claude Trichet warned of "strong upward pressure" on inflation.

Dollars and Euro
Dollars and Euro

Trichet also said some central bank governors favored raising the benchmark interest rate from its current 4 percent level, adding further strength to the euro.

Before the ECB's rate decision, financial markets expected the bank would not raise rates at all during 2008, with a significant minority forecasting a cut.

"The bottom line is that Trichet is telling us that he is not raising rates now, but if inflation increases, he will not hesitate to do so," said Kathy Lien, a currency strategist at DailyFX.com.

In late morning trading in New York, the euro traded 0.15 percent higher at $1.4623, after touching a session high of $1.4636.

The euro/yen also rose, climbing 0.5 percent to 162.71.

"There are upside risks to price stability over the medium term," Trichet said at a press conference.

"People were expecting a somewhat softer tone from the ECB, but that didn't happen," said Nick Bennenbroek, head currency strategist at Wells Fargo Bank in New York. "The ECB comments are giving a lift to the euro."

The British pound fell earlier to a fresh two-month low versus the dollar after the Bank of England cut rates by 25 basis points to 5.50 percent on Thursday.

Markets had priced in a chance of about 80 percent that the British central bank would cut rates following weak housing and service sector data, but economists had been more divided, with many seeing policy on hold.

The BoE cut follows a surprise easing from Canada on Tuesday, suggesting that the economic fallout from the U.S. subprime mortgage crisis and the subsequent credit crunch is not limited to the United States.

Sterling last traded little changed at 2.0254 to the dollar.

On Wednesday, the euro posted its biggest one-day drop since July 2006, with the dollar cheered in part by a stronger than expected reading from the U.S. ADP private sector jobs report.

The data prompted some economists to revise up their forecasts for Friday's non-farm payrolls report, while the futures market slightly trimmed expected chances of a 50 basis point U.S. rate cut to around 40 percent from around 50

Federal Reserve policy makers next meet on Dec. 11.

The Labor Department employment report is due at 8:30am ET (12:30pm London time) on Friday. The latest Reuters poll show economists forecast the U.S. economy added 75,000 employees in November.

"Despite today's moves in the currency markets, the main event of the week remains the payrolls report tomorrow," said Bennenbroek. "It may really help set up the direction for the dollar for next couple of weeks."

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