The euro dropped to session lows on Thursday after ECB President Mario Draghi hailed "solid" euro zone growth but kept rates unchanged, as dollar short positions unwound on strong US economic data. The euro fell to its lowest since mid-January at $1.211 after the European Central Bank announced its decision to keep monetary policy unchanged. The single currency had initially rebounded after Draghi played down concern over recent softness in data, but fell as the market digested the news and the US dollar rallied.
The euro has been weakening all week, after a bounce in US Treasury yields fired up dollar-buying and encouraged some to question whether the euro's rally since last year had run out of steam. Draghi "articulated a rising sense of concern about the economic momentum that sustained the euro zone during the last quarter of last year," said Karl Schamotta, director of FX strategy and structured products at Cambridge Global Payments in Toronto.
The US dollar continued its eight-day rally, rising to 91.637, its highest since January 12, against a basket of six currencies. The greenback was bolstered by strong economic data, as well as by the 10-year Treasury benchmark yield breaching the 3 percent threshold for the first time in four years earlier in the week. "There has been a short squeeze of the dollar," said Juan Prada, currency strategist at Barclays.
The number of Americans filing for unemployment benefits dropped to the lowest level in more than 48 years last week and the goods trade deficit tumbled in March on strong export growth. Traders are beginning to question whether the US dollar is really at risk of a long structural decline - as posited by many - when the Federal Reserve will be raising rates faster than other major central banks.
"You're seeing a washout of short dollar positions primarily," said Schamotta. "It is a far too crowded trade at this point. The perception that the dollar is inevitably going to decline as the US fiscal position worsens is not supported by history." Argentina's peso currency weakened to an all-time closing low of 20.60 per US dollar on Thursday, despite central bank interventions during the trading session and on Wednesday.
The sell-off is part of a "longer-term story that comes from the central bank losing credibility because in December they changed their inflation targets and they cut rates when markets were not ready for rate cuts," said Prada.
Against the yen, the dollar set a 2-1/2-month high of 109.46 yen but later eased to 109.32 yen.
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