The dollar weakened on Thursday after strong Australian jobs data sent the Australian dollar sharply higher and an upbeat U.S. corporate earnings report fuelled investor demand for higher risk and yield at the expense of the greenback.

Trading ranges in the European session were much narrower than they were in Asia, however, with dealers reluctant to take on too aggressive bets ahead of the European Central Bank and Bank of England policy decisions later in the day.

Australian data beat expectations for a fall in jobs in September, with 40,600 positions created instead, pushing the Aussie to a 14-month high against the U.S. currency as markets anticipated more interest rate hikes to come. [ID:nSYD431125]

U.S. aluminium producer Alcoa Inc (AA.N) reported a surprise third quarter profit, which boosted overall bullishness about a global recovery. [ID:nN07320124] European stocks rose 1 percent .FTEU3 and Wall Street futures pointed to a higher open too.

“The dollar looks like it will continue to fall as long as equities continue to hold or rally,” said Maurice Pomery, managing director of Strategic Alpha in London.

“Treasury yields remain soft and in fact, lower levels could be seen,” he said, noting the strong 10-year Treasury auction on Wednesday which drew solid demand from “indirect bidders”, often thought to be foreign central banks.

At 0955 GMT the dollar index .DXY, a measure of the greenback against six major currencies, was down 0.7 percent on the day at 75.96, not far off its 2009 low set last month at 75.827.

The euro was up 0.6 percent against the greenback at $1.4770 EUR= and the dollar was down 0.4 percent against the yen at 88.30 yen JPY=.

Wednesday’s eight-month low of 88.01 yen JPY= is the most immediate target, and a break below would bring January’s 13-year low of 87.10 yen into view as traders test how far and fast Japan’s Ministry of Finance will let the yen strengthen.

The biggest gainer was the Australian dollar, up 1.5 percent on the day to trade above $0.90 for the first time in 13 months AUD= and test options barriers at $0.9050.

EUROPEAN CENTRAL BANKS

On Tuesday, the Reserve Bank of Australia became the first central bank in the Group of 20 to raise its cash rate in this cycle. The move led to a general improvement in risk appetite and made leveraged carry trades even more attractive.

On the other hand, U.S. interest rates are set to remain anchored at record lows well into next year, making the dollar a possible funding currency for higher-yielding assets.

“The Aussie data was way above expectations … and certainly backs up what they did this week,” said Derek Halpenny, currency economist at BTM-UFJ in London, referring to the RBA’s rate hike.

“Equity markets are up, and the general sentiment there is good after the Alcoa figures,” he said, explaining that until U.S. interest rates and yields rise too, a backdrop of rising equities and risk appetite will be broadly dollar-negative.

Attention shifts to European interest rates now, with the ECB and BoE meetings. Both central banks are expected to keep rates at record lows of 1 and 0.5 percent, respectively, so the focus is what they say about their broader policy.

ECB President Jean-Claude Trichet might caution investors against high hopes of a speedy economic recovery. [ID:nL7664834]. There is also speculation that he might complain about the euro’s strength.

British rates are expected to remain on hold, although markets will be keen to get some insight on its quantitative easing programme. [ID:nL7579384]

“The BoE, which has (rightly) welcomed sterling’s (recent) slide, may resort to more guarded language as sterling is now the worst performing G10 currency, be it on a one-month or three-month horizon,” Citigroup strategists said in a note.

“On the other hand, the ECB has recently appeared more apprehensive of euro strength/dollar weakness, but is unlikely to deviate from language used in the G7 statement and its belief in the U.S. ’strong dollar’ policy,” they added.