Euro plunges as ECB decides to extend bond buying

By Richard Leong

NEW YORK (Reuters) - The euro tumbled on Thursday for its worst day against the dollar in 16 months as the European Central Bank prolonged its bond purchases well into 2018, diminishing the chances the ECB would raise interest rates next year.

Traders dumped the single currency after the ECB extended its bond purchase by nine months to September 2018 and left the door open to keep buying after that. The central bank said it will begin paring its monthly purchases by half to 30 billion euros starting in January.

Draghi, who expressed some optimism about euro zone growth at his press conference, remained cautious about the region's sluggish inflation which would need continued heavy stimulus in the form of quantitative easing (QE) from the ECB.

"Overall, the ECB’s focus on a very cautious and drawn-out tapering process that avoids pushing the euro higher was clearly more dovish than markets had been expecting," said James Chen, head of research at Gain Capital.

The ECB's decision about its bond purchases came five weeks after the Federal Reserve announced its plan to shrink its $4.5 trillion balance sheet that had ballooned from three rounds of QE this month.

The euro sagged to $1.1651, down nearly 1.4 percent from late Wednesday for its steepest one-day loss against the greenback since June 2016, Reuters data showed.

The single currency was down 1.2 percent at 132.79 yen . It retreated from 134.48 yen reached earlier on Thursday which was its strongest against the Japanese currency since December 2015.

The latest CFTC data showed that speculative net longs in the euro have retreated from their record highs but were still near multi-year highs at above $13 billion.

The euro was still nearly 11 percent stronger versus the greenback since the end of 2016.

The dollar has risen in recent days on optimism about forthcoming federal tax cuts and speculation U.S. President Donald Trump would select someone to head the Fed who may want to raise interest rates at a faster pace than current Fed Chair Janet Yellen.

Trump has narrowed his search for Fed chief to Fed Governor Jerome Powell and Stanford University economist John Taylor, Politico reported on Thursday citing one source, while another counselled caution.

Yellen, Trump's economic adviser Gary Cohn and former Fed Governor Kevin Warsh are also under consideration for the post.

Trump is expected to announce his candidate before his Asian trip in early November.

An index that tracks the dollar against euro, yen and four other currencies <.DXY> hit a three-month high at 94.668 after breaking key technical resistance. It gained 1 percent for its biggest one-day gain since Dec. 15.

(Additional reporting by Saikat Chatterjee, Ritvik Carvalho and Polina Ivanova in London; Editing by Susan Thomas and Chizu Nomiyama)

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