NEW YORK - The dollar rose across the board on Thursday after the European Central Bank left its key interest rate unchanged, focusing the market on interest rate differentials.
The Federal Reserve hiked its Fed funds rate by 25 basis points to 2.5 percent on Wednesday as expected and its statement after the decision cemented expectations of gradual tightening in the future.
In contrast to the Fed, the European Central Bank left its key interest rate steady at a record low of 2 percent for the 20th month in a row, as expected.
ECB President Jean-Claude Trichet said at a press conference after the decision that a key inflation gauge, the harmonized consumer price index, was expected to fall below 2 percent in 2005 without adverse shocks, prompting investors to assume the spread between U.S. and European rates will only widen.
"The ECB is not expected to be doing anything on rates for some time to come and Trichet is just reinforcing that," said Jeremy Fand, senior proprietary trader with WestLB in New York. "For foreign exchange traders that is just reminding them of interest rate differentials every time the Fed raises rates and the ECB does nothing and that should be dollar bullish."
The euro fell 0.6 percent compared with late prices in New York on Wednesday, at $1.2958 (EUR=).
The dollar rose about 1 percent to 104.65 yen (JPY=) and was up 0.9 percent to 1.2026 Swiss francs (CHF=), a 3-month high.
The yen fell broadly as Japanese investors bought euros (EURJPY=) for their purchases of euro-denominated bonds.
The dollar hit three-month highs versus the Swiss franc, also driven by weaker than expected inflation data in Switzerland.
The dollar's reaction to U.S. weekly jobless claims, however, was muted. Initial claims for jobless benefits thinned by 9,000 last week to 316,000, in a report that signaled healthy job growth.
"The claims numbers were potentially dollar bullish," said Lara Rhame, currency strategist at Credit Suisse First Boston, "but these are a couple of numbers the markets need to sift through."
The dollar did get a small boost from a report that showed U.S. business productivity rose at the smallest advance in almost four years, some said.
"Declining productivity is directly related to a stronger job market and gives the Fed confidence in their continued rate hike plans," said WestLB's Fand.
Investors are now waiting for Friday's release of key U.S. jobs data and a speech by Fed chief Alan Greenspan on the current account as well as the meeting of G7 rich nations and emerging economies on Friday and Saturday.
The Institute for Supply Management (ISM) U.S. services sector index and factory orders data are due later in the morning. ()