A pause in the European Central Bank's interest-rate cutting campaign sent the euro 1% higher against the dollar, as the common currency got a momentary reprieve from selling that recently drove it to a 16-month low.
The ECB's policy-setting committee kept its borrowing costs unchanged at 1%, a move most analysts had expected. ECB President Mario Draghi warned that risks to the 17-nation currency bloc's economy were still tilted to the downside, which could lead the central bank to renew its efforts to stave off recession in the crisis-hit euro zone.
Yet some investors interpreted the central bank's halt as a sign that even if economic conditions weren't getting better, they weren't yet growing worse. Both Italy and Spain—two of the euro zone's most battered economies—successfully auctioned debt, which alleviated selling pressure that has driven yields to near-unsustainable levels.
In the wake of weak U.S. data that tempered demand for the dollar, increased buying of the euro pulled it more than a cent above Wednesday's 16-month low at $1.2866.
"The market is taking a breather, since the dumping of the euro at the end of [2011] was pretty quick," said John Doyle, foreign exchange trader at Tempus Consulting in Washington.
Because U.S. data appears to be stronger on average than euro-zone figures, "moving forward the euro has some downside to go," Mr. Doyle said, adding that he expects a test of $1.25 by the end of the first quarter.
Late Thursday, the euro was at $1.2822 from $1.2706 late Wednesday. The dollar was at ÂĄ76.77 from ÂĄ76.86. The U.K. pound bought $1.5341 from $1.5328. The dollar fetched 0.9442 Swiss franc from 0.9541 franc.
The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 80.80, off 0.6%.
Normally, the ECB's policy decision would likely have spurred a broad rally in stocks and high-returning currencies. But the impact was blunted by two data releases that, at least momentarily, chilled investors. U.S. retail sales rose marginally in December, while the number of people seeking new unemployment benefits rose by more than expected.
In spite of Thursday's disappointing figures, most analysts still expect the dollar to gain, especially as Europe's debt crisis shows no signs of immediate resolution.
"The arguments for continued euro weakness are certainly compelling," said analysts at Credit Suisse in a research note. The bank expects the ECB will undertake more unconventional measures to ease liquidity strains in the euro zone, and cut interest rates again.
"Despite this, we would be cautious of extending short positions in the euro crosses, and see scope for short squeezes as euro stress increases in the weeks ahead," Credit Suisse added.
