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NEW YORK (Reuters) - The euro dropped over 1 percent on Thursday after the European Central Bank cut the size of its asset purchase program but extended it longer than many had expected.
The ECB said it would reduce its monthly asset buys to 60 billion euros as of April, from the current 80 billion euros, and extend purchases to December from March. It reserved the right to increase the size of purchases again.
"They are still going to buy a lot," said Steven Englander, global head of foreign exchange strategy at Citigroup in New York. "The nine months is important because it pushes out the period over which you expect rates to be negative."
The euro had strengthened since Italian Prime Minister Matteo Renzi's loss in a referendum over constitutional reform on Sunday was viewed as expected.
It briefly traded at a four-week high of $1.0872 in the aftermath of the ECB decision, before dropping to $1.0618, down 1.25 percent on the day.
"It didn't help the euro was at the highs; we had a clearing of euro shorts after the Italian referendum," said Vassili Serebriakov, FX strategist at Credit Agricole in New York.
"The fact that the euro was already sitting at those elevated levels contributed to the market being more comfortable to sell it after the ECB," he said.
The Federal Reserve is widely expected to raise interest rates for the first time this year when it meets next week, though it is also seen as likely to take a cautious tone on the economy.
Traders will be watching for any indications of how many rate increases Fed officials expect in 2017, after Donald Trump's surprise election as U.S. president on Nov. 8 increased expectations of greater fiscal stimulus to boost economic growth.
"Last meeting we had seven participants looking for three or more hikes next year and I think it'll be a big deal if that seven goes to 10 or 11," said Citi's Englander.
However, "they are also aware that rates are backing up and it might do damage to the housing market and the car auto market before any of this comes about, so I think they will be careful not to encourage it," Englander said.
The dollar index against a basket of six major currencies gained 0.87 percent to 101.10. Against the Japanese yen, the greenback increased 0.25 percent to 114.06.
Reporting by Karen Brettell; Editing by Frances Kerry and Richard Chang