April 26, 2018 / 2:52 PM / 5 months ago

FOREX-Euro at session lows as ECB holds on policy, dollar shorts unwind

* Euro dips to session lows after Draghi speech

* Dollar continues rise for eighth day

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh (Updates news, rates and analyst comments)

By Kate Duguid

NEW YORK, April 26 (Reuters) - 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 U.S. 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 U.S. dollar rallied.

The euro has been weakening all week, after a bounce in U.S. Treasury yields fired up dollar-buying and encouraged some to question whether the euro’s rally since last year had run out of steam.

After a strong run into February, the euro has since been stuck in a trading range against a dollar, as investors lowered expectations of the ECB moving rapidly towards the end of its monetary stimulus program.

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, Canada.

The U.S. dollar continued its eight-day rally, rising to 91.510, its highest since Jan. 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 three percent threshold for the first time in four years earlier in the week.

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 U.S. 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 U.S. fiscal position worsens is not supported by history.”

The rise in yields, driven by worries about the growing supply of U.S. government debt and inflationary pressures from increasing oil prices, has caused U.S.-Japan and U.S.-German yield differentials to widen further in the dollar’s favor, leaving the yen and the euro lower.

Against the yen, the dollar set a 2-1/2-month high of 109.46 yen but later eased to 109.26 yen. (Reporting by Kate Duguid Editing by Frances Kerry)

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