Bridgewater surges on euro short

Bridgewater typically bets on dozens of markets at once, making its portfolio relatively unconcentrated. Besides the bearish euro bet, winning positions for Pure Alpha funds in January included a long bet on the Japanese yen versus a short bet on the euro. The fund also made money on long stock bets in Europe, according to the person briefed on the performance.

In February, the largest winner was a long bet on Japanese equities, plus gains on U.S. and European stocks (also long). Smaller gains were made by betting long on interest rates in the U.S. and U.K., the person said.

In March, the largest gain came from a short of the British pound versus a long on the U.S. dollar. There were also winning short currency bets on the euro, Brazilian real, Australian dollar and Canadian dollar, according to the individual. Other winners were bullish bets on stocks and interest rates from both the U.S. and Japan.

Those portfolio gains came as Dalio recently expressed concern about making big investment bets ahead of a potential interest rate increase by the Federal Reserve.

“We expect a Fed tightening and are cautious about our exposures,” Dalio and Mark Dinner of Bridgewater wrote in a private note to clients and other followers March 11.

Read MoreDalio: Fed risks toppling apple cart, 1937-style

Bridgewater’s performance far outpaces many other hedge funds.

The average macro fund is up just 3.07 percent net of fees as of April 1, according to a report by Bank of America Merrill Lynch. The average return for all hedge fund strategies was 2 percent over the same period.

Read More‘Machine’ Ray Dalio takes on ‘Man’ Bill Ackman

Euro-dollar parity may be more elusive after Fed

The Fed tripped up the dollar’s rally and may have pushed the greenback into a short-term correction with its forecasts for a slower pace of interest rate hikes, strategists say.

The dollar index slumped as much as 3 percent in the worst selloff in six years, after a dovish U.S. central bank on Wednesday pared back its own forecasts for interest rate hikes, cut its outlook for inflation and warned the economy has been moderating. The euro hit a high of about $ 1.10 to the dollar, in Wednesday afternoon trading, from a low point of $ 1.05.

As the dollar fell, stocks rallied and bond yields declined. The strengthening greenback has been a key factor in markets, sending ripples through U.S. equities, as traders worry about its impact on the profits of multinationals. The strong dollar has also fanned fears about deflation, as it pounded commodities markets, like oil and gold and weighed on emerging markets.

“I think it’s extremely important. What it shows you is the dollar move we had this year is really impacting their (Fed) thinking. They haven’t said that before, but they’re telling you that in their forecast,” said Jens Nordvig, global head of G-10 currency strategy at Nomura. “I think a lot of people were getting too relaxed about the ‘Fed doesn’t care about the dollar,’ but the forecasts tell you they are already taking it into account a lot.”

Fed officials pared back their rate hike forecasts to a slower and lower trajectory. They basically cut the midpoint expectation for 2015 in half, with a year-end rate of about 0.6 percent. The central bank also forecast inflation would slow to half its prior projection-or 0.6 to 0.8 percent for 2015. Fed officials also reduced expectations for the longer-run unemployment rate to 5 to 5.2 percent, from 5.2 to 5.5 percent.

Read More Fed removes ‘patient’ but says no April hike coming

It also tweaked its growth forecast, trimming it to 2.3 to 2.7 percent for 2015 from 2.6 to 3 percent, and warned that export growth has weakened.

Nordvig said the about-face in the dollar, which had increased more than 10 percent year to date, could go on for several months. He expects a pullback “especially versus the EM currencies that have been beaten down significantly. I think this is something that could be a catalyst for a near-term turn,” he said.

But strategists also expect any dollar decline to be a blip in an otherwise upward trajectory.

Read More Dollar hammered amid Fed, euro surges past $ 1.10

“Everybody was tripping over themselves calling for 80 cents on the euro. It’s natural for the dollar to pause here,” said Boris Schlossberg, partner at BK Asset Management. “I don’t think the dollar rally is over by any stretch of the imagination … could we go close to parity? Yes, but for now I think $ 1.05 holds.”

Fed Chair Janet Yellen noted during Wednesday’s briefing that the dollar’s gains were the result of a stronger U.S. economy. The Fed’s steps toward tightening have been boosting the dollar at the same time other central banks , like the European Central Bank , have been easing. That has been a big factor in the euro’s decline.

As expected the Fed signaled it would move to hike rates, by dropping the word “patient” out of its statement. Economists had mostly expected the first hike in June or September but that has changed.

“Essentially what’s going on is June is starting to be priced out. It could be fully out. The question is are we going to have a question mark around September. … It’s not about shifting June to September,” said Nordvig.

Goldman Sachs economists for instance said their forecast remains for a first hike in September, but there are now risks it could be later.

Yellen also stressed that the removal of “patient” does not mean the Fed will move soon. Instead it will rely on data, especially on jobs and inflation.

Read More Here’s what changed in the new Fed statement

Data expected Thursday include weekly jobless claims and the current account, at 8:30 a.m. ET. The Philadelphia Fed survey and leading economic indicators are released at 10 a.m.

Traders are also watching to see whether Apple (AAPL) impacts trading in the Dow. It was included in the Dow 30, effective as of Wednesday’s close, replacing AT&T (NYSE:T). Dow component Visa (NYSE:V) also split 4-for-1. Other corporate news includes Lennar (LEN) earnings, before the bell, and Nike (NKE) earnings, after the market close.

But markets will also be focused on how the outcome of the Fed meeting shifts market expectations. Stocks jumped, with the Dow (Dow Jones Global Indexes: .DJI) up 227 at 18,076. Bond yields moved dramatically Wednesday, with the short end of the curve seeing a big decline. The two-year was yielding 0.54 percent late in the day, moving from 0.67 percent before the Fed statement.

Read More US stocks rebound on dovish Fed, with Dow topping 18K

Nordvig said his forecast for the dollar’s gains this year had been relatively conservative, compared to some. Many strategists had expected parity with the euro this year, but his year-end target for the euro remains $ 1.05 per dollar.

“We were expecting the Fed to blink in the period before June. They’re blinking earlier than we thought,” he said. “It … suggests the dollar is going to trade with a less clear global trend than we’ve seen.”

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Euro sinks close to 12-year low versus dollar

London (AFP) – The euro tumbled Tuesday towards a 12-year dollar low, hit by eurozone stimulus, growing US rate hike speculation and Greek debt concerns, dealers said.

In morning London deals, the European single currency sank to $ 1.0735 — the lowest level since mid-April 2003. The region’s stock markets were lower.

“The US dollar scored multi-year highs … amid starkly diverging outlooks for interest rates globally,” said analyst Daniel Sugarman at trading firm ETX Capital.

The shared eurozone unit continues to flounder one day after the European Central Bank launched its 1.1-trillion-euro ($ 1.2-trillion) quantitative easing (QE) stimulus “bazooka”.

The dollar neared an eight-year high against the yen as dealers bet on an interest rate hike from the Federal Reserve after bright US payrolls data.

The greenback surged in Asian trading hours to a high of 122.03 yen, a level not seen since July 2007. It later stood at 121.65 yen in London.

“Renewed upward momentum for the US dollar in the near-term has been reinforced by the stronger than expected US employment report for February which has supported investor expectations that the Fed remains on course to begin raising rates from the middle of this year,” said economist Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ.

– Record-low bond yields –

Meanwhile, the yield on German, Italian and Spanish 10-year government bonds fell to new record lows on the ECB bond-buying programme to combat deflation and boost growth.

The rate of return to investors on 10-year German government bonds fell to 0.279 percent from 0.312 percent on Monday.

The yield on 10-year Italian government bonds fell to 1.220 percent from 1.280 percent and those of Spain to 1.231 percent from 1.275 percent.

Europe’s main stock markets fell into the red, mirroring losses in Asia, as concerns lingered over Greek debt talks, while official data showed fresh weakness in economic powerhouse China.

In late morning deals on Monday, London’s benchmark FTSE 100 index of leading companies slid 1.15 percent to 6,797.60 points.

Frankfurt’s DAX 30 shed 0.82 percent to 11,487 points and the CAC 40 index in Paris lost 0.86 percent to 4,894.70 points compared with Monday’s close.

“European equity markets are … moderately lower this morning (on) renewed concerns that Greece might be running out of money soon,” said analyst Markus Huber at London-based broker Peregrine & Black.

“With negotiations between Greece and the Eurogroup finance ministers still not having yielded a result and time is running out fast, Greece appears once again destined to take centre-stage.”

– ‘Athens dragging heels’ –

Greece has agreed to start urgent technical talks on Wednesday on extending its crucial bailout after its eurozone partners accused debt-stricken Athens of wasting time in previous negotiations.

The main talks will be in Brussels but teams from Greece’s creditors will also be on the ground in Athens, Eurogroup chief Jeroen Dijsselbloem said, despite the new left-wing government’s earlier insistence that they should not return.

The announcement came after a meeting of eurozone finance ministers in Brussels on Monday, at which the Greek government outlined the reforms demanded by lenders in exchange for further cash.

“Athens is dragging its heels over reforms and patience is running low in Brussels,” added IG analyst David Madden.

“The Greek government is pushing the envelope with its creditors and the market is scared by the prospect of another long drawn-out debt negotiation.

“The ECB’s government bond-buying scheme is being overshadowed by Greece, and if Athens keeps pushing its creditors around it may receive a rap on the knuckles.”

Post Mortem on the Swiss Franc’s Euro-Peg

On January 15, 2015 the Swiss National Bank (SNB) announced an end to its three-year-old cap of 1.20 franc per euro. (The SNB introduced the cap in September 2011.) The SNB has also reduced its policy interest rate to minus 0.75 percent from minus 0.25 percent. The Swiss franc appreciated as much as 41 percent to 0.8517 per euro following the announcement, the strongest level on record — it settled during the day at around 0.98 per euro.

With Money Creation, It’s All Relative

We suggest that the key factor in determining a currency rate of exchange is relative monetary pumping. Over time, if the rate of growth of the money supply in country A exceeds the rate of growth of the money supply in country B then that country’s currency rate of exchange will come under pressure versus the currency of B, all other things being equal.

Whilst other variables such as the interest rate differential or economic activity also drive the currency rate of exchange, they are of a transitory and not of a fundamental nature. Their influence sets in motion an arbitrage that brings the rate of exchange in line with the influence of the money growth differential.

We hold that until now the rise in the money growth differential between Switzerland and the European Monetary Union during July 2011 and April 2012 was dominating the currency rate of exchange scene. (It was pushing the franc down versus the euro.) The setting of a cap of 1.20 to the euro to supposedly defend exports was an unnecessary move since the franc was in any case going to weaken. The introduction of the cap however prevented the arbitrage to properly manifest itself thereby setting in motion various distortions. (Note again the money growth differential was weakening the franc versus the euro.)

A fall in the money growth differential between April 2012 and April 2013 is starting to dominate the currency scene at present, i.e., it strengthens the franc against the euro. So from this perspective it is valid to remove the cap and allow the arbitrage to establish the “true” value of the franc. (This reduces the need to pump domestic money in order to defend the cap of 1.20.) Observe that as opposed to 2011, this time around, by allowing the franc to find its “correct” level the SNB — it would appear — has decided to trust the free market.

Note that since April 2013 the money growth differential has been rising — working toward the weakening of the franc versus the euro — and this raises the likelihood that the SNB might decide again some time in the future on a new shock treatment.

We hold that by tampering with the foreign exchange market the SNB sets in motion fluctuations in the growth momentum of money supply (AMS), and this in turn generates the menace of boom/bust cycles. (Note the close correlation between the fluctuations in the growth momentum of foreign exchange reserves, the SNB’s balance sheet, and AMS.)

Also, observe that by introducing the cap and then removing it — contrary to its own intentions — the SNB has severely shocked various activities such as exports. Note that the SNB is supposedly meant to generate a stable economic environment.

Image source: iStockphoto.

Euro Gain Looms as QE Expectations Haunt Draghi: Market Reversal

The euro will probably extend gains from an 11-year low against the dollar on prospects the European Central Bank will fail to exceed the market’s expectations for monetary stimulus this week, Nomura Holdings Inc. said.

The single currency may rebound to $ 1.20, from $ 1.1579 at 7:26 a.m. in London, should the ECB disappoint investors on Jan. 22 by merely reiterating that it is ready to take action when deflationary risks heighten, said Yunosuke Ikeda, Nomura’s Tokyo-based head of foreign-exchange strategy. A gauge of the euro’s movement signaled it dropped too fast after the Swiss National Bank abandoned the franc’s cap against the euro.

“Even if the ECB decides to introduce quantitative easing, a lack of details could send the euro back to levels before the Swiss move last week,” Ikeda said. “The euro could surge to $ 1.20 if the ECB only keeps repeating itself.”

Options are signaling that the market has fully priced in QE by the ECB, Ikeda said. The euro’s one-month risk reversals versus the dollar plunged to minus 2.39 percent on Jan. 16, the lowest since May 2012. A minus figure shows that demand for the right to sell the currency outweighs demand to buy.

The euro slid as much as 1.9 percent versus the greenback on Jan. 15, a day before touching $ 1.1460, the weakest since November 2003.

Relative Strength

The euro’s 14-day relative-strength index versus the dollar was at 18 today, below the 30 level that may indicate the currency has weakened too much and is poised to rebound. The gauge has been in oversold territory since Jan. 2.

ECB President Mario Draghi and his colleagues are unlikely to exceed the market’s expectations for stimulus to avoid upsetting Germany, Ikeda said. With plunging oil prices tipping the inflation rate below zero, policy makers have been arguing in media interviews and speeches over how to react. Much of that has been in Germany, where criticism of QE is strongest.

The selloff in the euro continued last week despite a drop in U.S. yields, Ikeda said. The two-year Treasury yields fell to 0.41 percent on Jan. 15, bringing the spread over comparable German notes to the narrowest in six weeks.

“The euro selling had been accelerating even as U.S. yields fell, leaving the impression it was oversold a bit,” Ikeda said. A rally will provide a good selling opportunity over the longer term, pushing the euro toward $ 1.10-$ 1.12 in June as the Federal Reserve may tighten, he said.

Hedge funds and other large speculators increased bearish euro positions for a fourth week, to a net 167,851 contracts, the latest data from the Washington-based Commodity Futures Trading Commission show. That’s near a record high of 214,418 reached at the height of the European debt crisis in June 2012.

While diverging monetary policy between the ECB and the Federal Reserve justify euro selling, fundamentals show the single currency is ripe for a rebound, said Daisuke Karakama, chief market economist at Mizuho Bank Ltd. in Tokyo.

“Markets are not looking at the euro zone’s current account surplus and deflation, factors that underpin the euro,” he said. “Everybody is just too tilted toward betting against the euro.”

To contact the reporters on this story: Hiroko Komiya in Tokyo at [email protected]; Chikako Mogi in Tokyo at [email protected]

To contact the editors responsible for this story: Garfield Reynolds at [email protected] Naoto Hosoda, Tomoko Yamazaki

Euro Is Near 11-Year Low Before ECB; Franc Holds Historic Rally

The euro was within 1 percent of its weakest since November 2003 amid speculation the European Central Bank will announce additional stimulus measures when it meets Jan. 22.

The shared currency is down this month against all major counterparts after the Swiss National Bank’s unexpected decision to abandon the franc’s cap versus the euro spurred investor expectations the ECB will announce government bond purchases, also known as quantitative easing. The Swiss currency was little changed today after rallying last week versus every counterpart on earth. The dollar held an advance versus the yen after U.S. consumer confidence surged.

“Nothing could be clearer than the current economic and policy divide than between the U.S. and Europe,” David De Garis, a senior economist at National Australia Bank Ltd. in Melbourne, wrote in a note to clients. As the Federal Reserve “ponders rate lift-off and U.S. consumer sentiment hits its highest level for 11 years, the ECB last week has been putting together a QE plan that will get some sort of approval from Germany.”

The euro was little changed at $ 1.1562 as of 7:50 a.m. in Tokyo after reaching $ 1.1460 on Jan. 16. The 19-nation currency was at 99.54 Swiss centimes after plunging 17 percent last week. The dollar traded at 117.40 yen after jumping 1.2 percent on Jan. 16.

JPMorgan Chase & Co.’s index of global currency volatility rose to 11.68 percent at the end of last week, the highest since June 2013, up from last year’s low of 5.28 percent.

SNB Surprise

The SNB had capped its exchange rate at 1.20 francs per euro as an exodus from European assets during the region’s debt crisis in 2011 strengthened the Swiss currency and raised the prospect of deflation. As well as removing the measure, the SNB said it will push the interest rate on sight deposits to minus 0.75 percent from minus 0.25 percent.

The change came just one week before ECB policy makers meet to discuss introducing new stimulus, including quantitative easing, a move that may add to pressure on the franc against the euro. The Bank of Japan gathers on Jan. 21 to consider progress on its stimulus after it boosted an already unprecedented bond-buying program in October.

Spiegel magazine reported ECB President Mario Draghi briefed German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble on a plan for national central banks to buy sovereign bonds issued by their own country.

As the ECB looks to add stimulus, the U.S. Federal Reserve is moving toward raising interest rates for the first time since 2006. There’s a 64 percent chance the Fed will raise its benchmark rate to at least 0.5 percent by December, futures data compiled by Bloomberg show. At the end of last year, wagers were focused on a September start.

The euro has tumbled 5.2 percent in the past month to lead declines among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar climbed 0.9 percent, the yen added 2.9 percent and the franc jumped 17 percent.

To contact the reporter on this story: Andrea Wong in New York at [email protected]

To contact the editors responsible for this story: Dave Liedtka at [email protected]; Kenneth Pringle at [email protected]; Paul Cox at [email protected] Naoto Hosoda

US Dollar Targets Fresh Highs versus Euro, but What Could Change?

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US Dollar Targets Fresh Highs versus Euro, but What Could Change?

US Dollar Targets Fresh Highs versus Euro, but What Could Change?

Fundamental Forecast for US Dollar: Bullish

  • US Federal Open Market Committee meeting leaves US Dollar and yields sharply higher
  • The US currency has proven sensitive to the Russian Financial crisis – next moves key
  • Want to develop a more in-depth knowledge on the market and strategies? Check out the DailyFX Trading Guides

The US Dollar finished at fresh multi-year highs versus the Euro and near key peaks versus other currencies, boosted by a sharp improvement in US interest rate expectations on a highly-anticipated Fed interest rate decision.

We expectsignificantly less volatility in the holiday-shortened week ahead, but traders should be wary of any surprises from revisions to the Q3 US Gross Domestic Product report, US Durable Goods Orders data, and two Home Sales releases. Although admittedly unlikely, any surprises in the third revision to Q3 GDP figures could have a marked effect on US interest rates and the Dollar itself.

The US Dollar jumped alongside short-term yields on this past week’s highly-anticipated US Federal Open Market Committee interest rate decision. Fed officials initially disappointed those who expected a more hawkish shift in policy in the first FOMC meeting since the end of Quantitative Easing in October. Yet short-term treasury yields and implied US interest rates rose sharply as Fed Chair Janet Yellen essentially said that rate hikes could come after as few as two meetings.

The US Dollar continues to track changes in the US 2-year Treasury Yield—a strong proxy for Fed interest rate expectations—with great accuracy. A sharp reversal leaves the 2-year UST yield at more than twice the low it set through October 15—the exact day of the US Dollar low as seen through the Dow Jones FXCM Dollar Index (ticker:ticker::USDOLLAR). Since that date, the Greenback has surged a remarkable 11 percent versus the interest-rate sensitive Japanese Yen, 7 percent versus the Australian Dollar, and 5 percent versus the Euro.

US Dollar traders will almost certainly track changes in yields and interest rate expectations, and a key question is whether domestic economic data can continue to impress and send rates and the USD to further peaks. Dollar momentum seems stretched, and economic data can only surpass expectations for so long. Yet the US Dollar remains in an uptrend until it isn’t, and we’ll need to see concrete signs of a turn to call for a meaningful turnaround.

Traders should otherwise keep an eye on developments in the Russian financial crisis and broader Emerging Markets. Many were surprised to see the US S&P 500 track the USD/Ruble exchange rate on a virtual tick-for-tick basis, but the truth is that further destabilization in Russia threatens contagion and carries direct implications for global financial markets.

Contagion risks sent the S&P 500 sharply lower and the flight to safety likewise pushed the US Dollar down versus the Euro and Yen as traders excited USD-long positions in a hurry. Both the Greenback and the S&P recovered sharply into the end of the trading week. Whether or not the Dollar continues higher may subsequently depend on the trajectory of the Ruble and broader financial market risk sentiment. –DR

Written by David Rodriguez, Quantitative Strategist for DailyFX.com David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFX PLUS.

Contact and follow David via Twitter: https://twitter.com/DRodriguezFX

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BNP Says Euro, Yen Declines Top Trades for Second Year in 2015

BNP Paribas SA is forecasting the euro and yen will slide versus the dollar in 2015, sticking with its best-performing trades this year.

France’s largest bank is targeting a 7 percent decline by the euro to $ 1.15 next year and a 7 percent slump by the yen to 128 per dollar, according to analysts led by Steven Saywell, the lender’s London-based global head of foreign-exchange strategy.

The currencies have both tumbled more than 9 percent versus the greenback this year as the European Central Bank and Bank of Japan unveiled unprecedented programs of stimulus to boost growth in their struggling economies. The Federal Reserve is moving toward its first interest-rate increase since 2006, providing a potential catalyst for further dollar strength. BNP sees the Fed tightening monetary policy in June.

“Our top trades for 2015 are similar to those that proved successful in 2014: short euro and yen as policy divergence continues to dominate,” Saywell wrote in an e-mailed note today. “Whereas 2014 was about the ‘easers — the ECB and the BOJ — 2015 will see emphasis on the ‘hikers.’’’ A short position is a bet an asset will decrease in value.

Europe’s 18-nation currency bought $ 1.2431 as of 10:41 a.m. in New York, rising 0.9 percent. The yen strengthened as much as 1.9 percent to 119.44.

Fed Policy

The Fed meets next week as U.S. economic reports show signs of strength in the labor market. Nonfarm payrolls rose the most since January 2012 in November, data last week showed. That has helped to fuel the debate of whether the central bank will drop a reference to holding borrowing costs low for a ‘‘considerable time’’ at its meeting Dec. 16-17.

BNP wagered the euro would slump to $ 1.25 in 2014, gaining 9.6 percent on that trade. The bank saw the yen at 118, a position that returned 12.3 percent this year. The euro has fallen 11.2 percent this year while the yen is down 14 percent.

The median forecast of more than 50 strategists surveyed by Bloomberg News calls for the euro to slip to $ 1.19 by the end of 2015 and Japan’s currency to decline to 124 yen per dollar.

Next year, BNP also sees upside for the Australian dollar versus the yen and for sterling against the euro and the Swiss franc. BNP expects the Bank of England to raise interest rates in August.

To contact the reporter on this story: Rachel Evans in New York at [email protected]

To contact the editors responsible for this story: Dave Liedtka at [email protected] Paul Cox

FOREX-Dollar slides from two-year high vs euro, 7-year peak vs yen

* Euro falls after Nowotny says QE has valuable role

* Investors look ahead to December Fed meeting (Updates prices, adds details)

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 8 (Reuters) – The dollar dropped from a seven-year high against the yen and a two-year peak versus the euro on Monday, as investors consolidated gains made following a strong U.S. jobs report that is expected to trigger an interest rate increase next year.

The greenback’s outlook remained upbeat despite Monday’s fall. Investors were already looking ahead to the December monetary policy meeting of the U.S. Federal Reserve next week, watching for a change in the statement’s language to a more hawkish tone.

The dollar posted its largest one-day loss against the yen since mid-October, falling after four straight days of gains. On the year, however, the dollar was still up 14 percent.

The U.S. currency’s losses were in line with the drop in Treasury debt yields and stocks. The benchmark U.S. 10-year note yield was last at 2.24 percent, down from 2.31 percent last Friday.

“We’re drifting off in the dollar and this is just consolidation,” said Shaun Osborne, chief currency strategist at TD Securities in Toronto. “All the signs point to a stronger dollar. Oil prices are down, we have a Fed meeting next week and some are pointing to a possible change in language.”

Earlier in the session, the dollar soared to a fresh two-year high against the euro, a seven-year high versus the yen and touched a five-year peak versus a currency basket. It also rose to its highest in 15 months versus the pound.

The euro stumbled after Ewald Nowotny, the Austrian central bank chief, said government bond buying could be valuable in addressing the “massive” weakening of the euro zone economy.

The euro fell to a low of $ 1.2247 after Nowotny’s comments, but was last up 0.4 percent at $ 1.2332.

“Markets are pretty much pricing in a Fed rate hike by the middle of 2015 and a growing likelihood of the ECB unleashing full scale QE (quantitative easing) in the months ahead,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

The dollar surged to 121.84 yen, before falling 0.8 percent to 120.52 yen. Japan’s national election on Dec. 14 is seen as likely to give a boost to Prime Minister Shinzo Abe and reflationary policies that should further weaken the yen.

The dollar index climbed as high as 89.550, its highest since March 2009. The index was last at 89.047, down 0.3 percent.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Jeffrey Benkoe and Chizu Nomiyama)

FOREX-Dollar falls from two-year high vs euro, 7-year peak vs yen

* Euro falls after Nowotny says QE has valuable role

* Investors look ahead to December Fed meeting (Recasts, changes byline, dateline from previous LONDON)

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 8 (Reuters) – The dollar slid from a seven-year high against the yen and a two-year peak versus the euro on Monday, as investors consolidated gains made following a strong U.S. jobs report that is expected to trigger an interest rate increase next year.

The greenback’s outlook remained upbeat despite Monday’s fall. Investors were already looking ahead to the December monetary policy meeting of the U.S. Federal Reserve next week, watching for a change in the statement’s language to a more hawkish tone.

“We’re drifting off in the dollar and this is just consolidation,” said Shaun Osborne, chief currency strategist at TD Securities in Toronto. “All the signs point to a stronger dollar. Oil prices are down, we have a Fed meeting next week and some are pointing to a possible change in language.”

Earlier in the session, the dollar soared to a fresh two-year high against the euro, a seven-year high versus the yen and touched a five-year peak versus a currency basket. It also rose to its highest in 15 months versus the pound.

The euro stumbled after a leading European Central Bank policymaker said government bond buying could be valuable in addressing the “massive” weakening of the euro zone economy.

Ewald Nowotny, the Austrian central bank chief, has been a bellwether for shifts in ECB policy, and has been seen as part of the German-led group on the ECB’s governing council opposing what is viewed as outright money printing.

The euro fell to a low of $ 1.2247 after Nowotny’s comments, then flat on the day at $ 1.2284.

“Markets are pretty much pricing in a Fed rate hike by the middle of 2015 and a growing likelihood of the ECB unleashing full scale QE (quantitative easing) in the months ahead,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

The dollar surged to 121.84 yen, before falling 0.6 percent to 120.84 yen. Dealers said the yen was supported by around $ 2 billion worth of options expiries at 121.50 yen per dollar, putting a cap on the dollar’s strength.

Japan’s national election on Dec. 14 is seen as likely to give a boost to Prime Minister Shinzo Abe and reflationary policies that should further weaken the yen.

The dollar index climbed as high as 89.550, its highest since March 2009. The index was last at 89.279, slightly lower on the day.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Patrick Graham in London; Editing by Jeffrey Benkoe)