The dollar climbed on Thursday, shrugging off a long-expected euro zone interest rate increase, as the outlook for future European Central Bank rate hikes dimmed the euro's prospects.
The ECB, as expected, lifted its benchmark refinancing rate by a quarter percentage point to 2.25 percent. But traders sold the euro after ECB President Jean-Claude Trichet repeated comments made last month that the bank's first rate increase in five years is unlikely to mark the start of a more prolonged tightening cycle.
The ECB also omitted the words "strong vigilance" with respect to price stability in its statement. Analysts said it was the first time since May 2004 that the word "vigilance" was not used in the first summary paragraph of the introductory statement and suggested the ECB may not all be that worried about inflation, for now.
Compared with the Federal Reserve, which seems on track to raise rates further even though US October inflation readings were below forecasts on Thursday, Trichet's relative dovishness is a drag for the euro and therefore a boon for the dollar.
"We had comments from Trichet reiterating that the rate hike today doesn't really mean the ECB is on an extended series of hikes, as in the case of the Federal Reserve. That was extremely supportive of the dollar," said Jeff Gladstein, global head of foreign exchange trading at AIG Group, in Wilton, Connecticut.
In late trading, the euro was down against the dollar at $1.1732 off 0.4 percent from late Wednesday. It hit a low of $1.1691 in the wake of Trichet's remarks, according to traders.
Traders also said market participants took profits ahead of the US payrolls report for November due on Friday. Markets are expecting around 210,000 new jobs, according to a Reuters poll.
Some analysts believe that the euro will make a fresh 2005 low below $1.1640 before the end of the year. The greenback's strength against the euro helped lift the US currency to its highest level against the yen in two and a half years.
After breaking options-related resistance at 120 and 120.50 yen, the dollar hit 120.73 yen, its highest since April 2003, according to Reuters data. It then pared gains to trade at 120.53 yen, still up 0.6 percent on the day.
"I think there is a little room to go on the upside in dollar/yen. But we may see a lot of strategic dollar selling in the 121-122 area by some long-term players." said AIG's Gladstein.
The dollar was also up 0.2 percent against the Swiss franc at 1.3176 francs, while sterling was flat at $1.7304.
Trichet's reluctance to commit to further rate hikes suggests the dollar's yield advantage over the euro shows no sign of diminishing. The Fed is expected to raise benchmark US rates, currently at 4 percent, at scheduled policy meetings this month and next.
The dollar was also modestly supported by US economic data on Thursday.
The Institute for Supply Management's manufacturing index slipped to 58.1 in November from 59.1 in October, but that was still slightly above forecasts of 57.5. The employment index rose to 56.6 in November from 55 the previous month. Readings above 50.0 denote sector expansion.
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