The euro fell on Friday, having posted its biggest one-day surge in nearly seven years when the latest round of easing by European Central Bank fell well short of market expectations, with focus now turning to the US jobs report. The euro shed 0.75 percent against the dollar to trade at $1.0862 after shooting 3.1 percent higher on Thursday, its biggest one-day gain since March 2009. It had fallen to a 7-1/2 month low of $1.0523 on Thursday before jumping to as high as $1.0981 after the ECB's measures were announced.
Investors scrambled to unwind hefty short euro positions on a bare-minimum easing package in which the ECB cut its deposit rate by a mere 10 basis points and extended its asset buys by six months. Following recent dovish comments from ECB President Mario Draghi, markets had expected more aggressive measures including a larger cut in the deposit rate and perhaps even an increase in the monthly pace of asset purchases.
"Draghi caused a great deal of disappointment, dislocation and pain," said Jeremy Stretch, head of currency strategy at CIBC World Markets. "Today, the pain trade could come from disappointing US jobs number. But with the dollar index having fallen pretty sharply, we expect that a reading between 175-200,000 should allow the dollar to consolidate." While November payrolls might not be as impressive as the 271,000 new jobs created in October, economists still expect a solid addition of 200,000 jobs for last month. The report is likely to support the case for a December rate hike, unless a shock reading below 150,000 or soft wage growth derails chances of a lift off. Federal Reserve Chair Janet Yellen, speaking on Thursday, said the United States may be "close to the point at which we should be raising" rates. Yellen also said the economy needs to add fewer than 100,000 jobs a month to cover new entrants to the workforce, perhaps setting an implicit floor for jobs growth that policymakers want to see.
Nevertheless, the euro's explosive rally on Thursday knocked the dollar index back to a one-month low of 97.591, from a 12-1/2-year peak of 100.510 hit midweek. The index shed 2.1 percent on Thursday, its worst performance since March 2009. It last stood at 98.326, up 0.7 percent on the day.
"The euro's adjustment higher is not yet complete and even a strong US payrolls number exceeding consensus should not put euro under meaningful pressure," Morgan Stanley said in a note. Meanwhile, the dollar's recovery on Friday saw China's yuan lose ground. The yuan ended onshore trading at its softest since late August, pressured by a spat of dollar purchases late in the session.