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Likelihood of interest rate hike by Sept. pegged at 56%

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(Bloomberg) — The euro lingered at almost an 11-year low as the European Central Bank began purchasing sovereign debt to head off deflation and spur economic growth.

The common currency touched the weakest since September 2003 before trimming losses. It slid for the past three weeks as the central bank readied the quantitative-easing program after record-low borrowing costs, including a negative deposit rate, failed to stem an economic slump.

The euro tumbled Friday after data showed the U.S. labor market strengthened more than forecast, adding to speculation the Federal Reserve will raise interest rates before year-end.

“The combination of negative rates and QE is a brave new world for foreign exchange,” said Jonathan Webb, head of foreign-exchange strategy at a unit of Jefferies International Ltd. in London. The euro’s decline “is a longer-term move, and there’s nothing stopping that trend from continuing.”

The euro was at $1.0865 at 10:13 a.m. New York time, up 0.2 percent, after dropping earlier to $1.0823. It sank 1.7 percent versus the dollar on Friday, the steepest decline since Jan. 22. The 19-nation currency advanced 0.3 percent to 131.37 yen.

“Sentiment is negative” for the euro, Georgette Boele, a currency strategist at ABN Amro Bank NV, said by phone from Amsterdam. “We still think that there’s more to go.”

The ECB’s bond-buying comes as the Bank of Japan is making unprecedented debt purchases and central banks from Sweden to Turkey to China have lowered borrowing costs to boost their economies. In contrast, the Fed is considering when to raise interest rates as the U.S. economy improves.

‘Compelling Case’

The divergence “is providing a compelling case for a significantly weaker euro relative to the dollar,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London.

Bank of Tokyo-Mitsubishi predicts the euro will drop to $1.05 percent this year, Hardman said. The declines so far have been faster than the bank predicted, and a slide to parity in the next year is “plausible,” he said.

American employers added 295,000 workers in February and the unemployment rate fell to 5.5 percent, the lowest in almost seven years, Labor Department figures showed. Economists surveyed by Bloomberg News projected an increase of 235,000 jobs and a jobless rate of 5.6 percent.

Traders saw a 56 percent probability Monday that the benchmark rate will be raised to at least 0.5 percent by September, according to futures data. The likelihood on March 5 was 49 percent.

“Job growth has been nothing short of stellar over recent months,” New York-based economists Tom Porcelli and Jacob Oubina at Royal Bank of Canada’s RBC Capital Markets unit wrote in a client note Monday. “With yet another firm payroll report in hand, we think it becomes extremely easy for the Fed to justify lifting rates in June.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, was little changed at 1,198.22. On Friday, it gained 1.2 percent to 1,198.93, the highest close in data going back to 2004.

–With assistance from Lukanyo Mnyanda in Edinburgh.