LONDON: The euro was back on the defensive on Friday, sold again after a European Central Bank meeting that, once the dust had settled, solidified expectations that it will conduct its first outright government bond-buying early next year.
The dollar was also back above 120 yen, its highest in more than seven years, helped by a media article showing that simulations by Federal Reserve economists suggest it would be best to raise interest rates immediately.
The US central bank so far looks nowhere near doing so, but expectations that it will hike some time next year are at the heart of the dollar's rally since July.
Trade on Friday hung on how much monthly US jobs numbers later in the day push that debate forward.
Both the ECB and the Bank of Japan are headed in the opposite direction and major banks are unanimous in predicting a broadly stronger dollar as a result.
Many, however, say moves into the end of this year may now be limited.
"The market is still intent on selling the euro, but I think the speed of the fall will now not be anything like what it has been in the past couple of weeks," said Adam Myers, European head of FX strategy at Credit Agricole in London.
He had targets for the end of the year of 122 yen per dollar and $1.2250 per euro.
The dollar rose as high as 120.62 yen in morning trade in Europe.
The euro was 0.3 percent lower on the day at 1.2348, having retreated from highs around $1.2450 hit in a clearout of market positioning after Thursday's ECB meeting.
Some in the market were disappointed Governor Mario Draghi did not find some even more explicit way of moving the bank closer to outright quantitative easing. But his language, and a veiled warning that opposition from German policymakers would not stand in the way of the governing council acting if need be, pointed towards the launch of bond-buying in the first quarter.
"Taking on board likely further falls in headline HICP (inflation), Draghi's comments give succour to the idea that further policy moves are coming at the next couple of meetings," said Gavin Friend, senior markets strategist at National Australia Bank.
"These are likely to include corporate bond and sovereign QE and possible adjustments to the 'intended' size of balance sheet expansion -- QE that will in time unseat the euro further."
US non-farm payrolls are due at 1330 GMT. Analysts polled by Reuters expect employers added 230,000 new jobs to their payrolls last month and for the unemployment rate to remain unchanged at 5.8 percent.
"There may be some short-term distortion after the data today but that is all it will be," said a senior dealer with one large US bank in London. "Like yesterday's moves we have these occasional sharp adjustments.
But this is a once in a decade event: there is only one direction for the dollar and it is up."
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