The U.S. dollar extended gains Thursday, taking the greenback to the highest level in nearly three months, following a surprise move from the European Central Bank that looks set to keep interest rates in the bloc at record lows until at least the end of the year.
The ECB held its key rates steady Thursday, including the -0.4% charge it applies to overnight deposits, adding it's unlikely to change them until at least the end of the year, sending the euro sharply lower against the dollar and underscoring the weakness of the world's biggest economic bloc. The Bank also said it would launch a new lending program for the region's commercial banks and slashed it 2019 growth forecast to 1.1% from 1.7%.
"Real GDP growth remained unexpectedly sluggish in the fourth quarter of 2018, and recent indicators point to substantially weaker than previously expected activity also in the first half of 2019," the ECB said in statement released alongside its fresh economic forecasts. "While some temporary factors are likely to have contributed to the slowdown in activity in late 2018, the broad-based worsening of economic sentiment indicators across countries and sectors in recent months suggests that more persistent adverse factors have also been at play and that the underlying cyclical momentum is somewhat weaker than previously assessed."
The U.S. dollar index, which tracks the greenback against a basket of six global currencies was pegged at 97.34 by mid-morning in New York, the highest since December 17 and 0.5% gain on the session.
The ECB had planned to modestly tighten its monetary policy near the end of this summer, but said Thursday that rates will remain "at their present levels at least through the end of 2019", a move that not only marks a sharp change in the bank's guidance but also guarantees that ECB President Mario Draghi will serve out his seven year term in Frankfurt without ever having raised interest rates for the 19 countries that use the single currency.
"The extension of the ECB forward guidance today suggests the second step of the ECB policy normalisation (i.e. the rate hikes - after the first step being the end of QE) is a very distant possibility," said ING's chief foreign exchange strategist Petr Krpata. "Any meaningful EUR/USD upside is likely to chiefly come (if it comes) from a weaker USD environment (and) this is unlikely to occur in the coming months as the Fed should deliver one more hike."
The ECB decisions pushed the euro to 1.1224 against the dollar, a 0.75% decline on the session and a move that extends the currency's six-month side to around 4.7%.
Benchmark 10-year German bund yields, a proxy for risk-free interest rates in the currency area, fell to 0.074%, the lowest since October 2016, while the Stoxx Europe 600 index extended declines to around 0.6% on the session.
The dollar has the potential to add further gains Friday if non-farm payrolls for the month of February rise past the 190,000 figure expected by analysts, although yesterday's private sector job creation data from ADP suggesting slowing employment growth in the world's largest economy.
In fact, the US might be the only major economy expected to hold gains this year, with the Organisation for Economic Co-Operation & Development slashing its global growth forecast to 3.3% this year and 3.4% in 2020, clipping 0.2 and 0.1 percentage points respectively from the group's prior estimate, earlier this week.
"Economic prospects are now weaker in nearly all G20 countries than previously anticipated," the OECD said. "Vulnerabilities stemming from China and the weakening European economy, combined with a slowdown in trade and global manufacturing, high policy uncertainty and risks in financial markets, could undermine strong and sustainable medium-term growth worldwide."