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The euro rose to a fresh 4-month high against the dollar on Friday on expectations the European Central Bank may raise rates next month following comments by ECB President Jean-Claude Trichet the previous day.
"The market was unprepared for Trichet to lay the foundation for an April rate hike," said David Watt, strategist at RBC Dominion Securities.
Comments by ECB official Nout Wellink added to this view on Friday, when he was quoted in DNB magazine saying the central bank should raise rates sooner or later.
"We think the euro will remain strong in the next week or two, possibly even testing...highs of $1.4280," said Christopher Gothard, head of FX for Brown Brothers Harriman, referring to the euro's next major peak on charts, its early November high of $1.4283.
"Trichet's comments have bolstered rate hike expectations, and even though we're not certain the scenario of an April hike will play out - Europe still has the fiscal debt issues and poor growth in many areas - for the moment it's providing support," Gothard added.
In a sign of its broad strength in the wake of Trichet's comments, the euro hit a 10-month high against the New Zealand dollar of NZ$1.8935 on Friday and touched a five-week high versus the Australian dollar near A$1.3800 .
The dollar's near-term direction hinges on U.S. non-farm payrolls data due later on Friday. Analysts expect the report to show a rise of 185,000, following a tepid 36,000 increase previously.
"That will be good for the dollar and especially dollar/yen. Markets are currently priced for no rate hikes in the U.S. until 2013. I think that (rate) call will start coming back in and that will be positive for the dollar," a trader at a U.S. investment bank said.
A disappointing number, however, could fan worries about the outlook for the U.S. labour market, especially given uncertainty about how the recent surge in oil prices may affect the U.S. economy and companies, Robert Ryan, FX strategist at BNP Paribas. "If we get something below 125,000 or 120,000 I think there will be an enormous amount of disappointment," Ryan said. "We could very quickly start talking about QE3 as a realistic prospect," he said, referring to the issue of whether the U.S. Federal Reserve will take further quantitative easing measures after its $600 billion bond-buying programme is over.
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