The euro rallied on Thursday after European Central Bank President Mario Draghi said there is no euro zone deflation problem, following the bank's decision to leave interest rates unchanged and wait for more data before taking action.
Leaving the main monetary policy rate at 0.25 percent did not immediately spark the short-covering rally that saw the euro zone currency climb against the U.S. dollar, yen, and sterling.
"Really the move started when (Draghi) mentioned there is no deflation problem. That is when the euro gapped higher because when you are denying deflation you are not easing anytime soon," said Sebastian Galy, senior currency strategist at Societe Generale in New York.
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The market was largely betting the other way on the ECB, expecting either a rate cut or a strong signal from Draghi that this was a prospect. It got neither and that set off the euro's short-covering rally to hit a one-week high of $1.36190, up 0.56 percent, against the U.S. dollar, according to EBS data. The euro hit a two-month low on Monday.
A bigger-than-expected fall of 20,000 new claims for U.S. unemployment benefits to a seasonally adjusted 331,000 did little to help underpin the U.S. dollar. The U.S. trade deficit widened to $38.7 billion in December as exports fell and imports rose.
While the U.S. data was mixed, the ECB's decision to wait for more economic data before acting on what kind of stimulus it might take raised questions about the euro zone's recovery despite its already ultra-low borrowing costs meant to push up prices.
(Read more: Deflation worries back as euro zone inflation falls again)
