September 4, 2014 / 3:49 AM / 3 years ago

Euro plummets after ECB cuts rates, announces asset purchases

Euro and U.S. dollar banknotes are seen in this picture illustration taken in Prague January 23, 2013. REUTERS/David W Cerny

NEW YORK (Reuters) - The euro posted its biggest one-day loss against the U.S. dollar in nearly three years on Thursday after the European Central Bank cut interest rates and said it would launch an asset purchase programme to ward off deflation.

The dollar notched its biggest one-day gain against a basket of major currencies since August 2013 after ECB President Mario Draghi said the central bank would also start purchasing securitised loans and covered bonds next month.

Draghi spoke at a news conference shortly after the ECB unexpectedly cut already record-low interest rates by another 10 basis points. The euro broke below $1.3000 for the first time in 14 months and posted its biggest one-day drop since November 2011.

“It’s an aggressive move on behalf of the ECB,” said Richard Scalone, co-head of foreign exchange at TJM Brokerage in Chicago. “It’s pretty clear that the euro is going to be in for a period of protracted weakness.”

Speculation had grown that the ECB could embark on asset purchases after Draghi hinted at such a policy shift at a central bank symposium in Jackson Hole, Wyoming, on Aug. 22.

Data showing strength in the U.S. services sector also supported the dollar. The Institute for Supply Management said its services index rose to 59.6 in August, marking the highest reading since the index’s inception in January 2008.

The dollar’s strength was not affected by weaker-than-expected U.S. jobs data. The ADP National Employment Report of private-sector employment showed U.S. companies hired 204,000 workers in August, below economists’ expectations, according to a Reuters poll.

The Labor Department said initial claims for state unemployment benefits increased to 302,000 for the week ended Aug. 30, slightly above expectations.

The Labor Department on Friday will release its U.S. non farm payrolls report for August, and analysts said a strong figure could underpin the dollar’s strength by paving the way for an early rate hike from the U.S. Federal Reserve. Economists polled by Reuters expect U.S. employers to have added 225,000 jobs in August.

“A figure that maintains the status quo sets us up for a potential shift in Fed rhetoric at the next FOMC meeting,” said Mark McCormick, currency strategist at Credit Agricole in New York. The Fed’s next policy meeting will be held on Sept. 16-17.

The euro EUR= was last down 1.55 percent against the dollar, at $1.2946, up slightly from the 14-month low of $1.2921 reached earlier. Against the yen, the dollar was up 0.31 percent, at 105.11 yen JPY=, and was up 1.54 percent against the Swiss franc CHF=, at 0.9316 franc.

The euro fell to 1.20450 against the Swiss franc EURCHF=EBS on the EBS platform, marking its lowest level since November 2012. The U.S. dollar index .DXY, which measures the greenback against a basket of six major currencies, was last up 1.08 percent at 83.760.

Editing by Jonathan Oatis and Leslie Adler

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