By William L. Watts and Virginia Harrison, MarketWatch
LONDON (MarketWatch) — The U.S. dollar erased early gains versus major rivals Monday, resuming its recent downtrend as the euro was propelled higher ahead of this week’s meeting of European Central Bank policy makers.
The dollar index (DXY 76.90, -0.37, -0.48%) , which measures the U.S. unit against a basket of six currencies, traded at 76.876, down from 77.24 in late North American trade Friday. The index is on track for a 1.1% decline for the month of February and has fallen 2.7% since the start of the year.
The euro (EURUSD 1.3824, +0.0068, +0.4943%) bounced back from losses in Asian trade to change hands at $1.3833, up from around $1.3750 on Friday. See real-time currency quotes and tools.
The euro (EURYEN 113.2100, +0.8100, +0.7208%) rose 0.9% versus the Japanese currency to trade at 113.28 yen.
Meanwhile, the British pound (GBPUSD 1.6223, +0.0115, +0.7139%) rose to $1.6230, up from $1.6094 Friday.
“With risk appetite largely unchanged, market focus remains on relative yields and thus currencies with better prospects of rate hikes benefit,” said Chris Walker, currency strategist at UBS.
That means more strength for the euro, the British pound and the Swedish krona.
The ECB is widely expected to leave its key lending rate unchanged at a record-low 1% when its Governing Council meets Thursday. But ECB President Jean-Claude Trichet’s subsequent monthly news conference is expected to highlight inflation concerns amid rising prices for oil and other commodities.
Financial markets took in stride the victory of opposition Fine Gael in Ireland’s general election. Fine Gael leader Enda Kenny indicated he will seek changes in terms of the nation’s bailout package. Observers said there is room for only limited concessions, but that the tone of talks could impact sentiment toward the euro-zone periphery in the near term. Read story about the Irish election.
The dollar rose to ¥81.85 versus the yen (USDYEN 81.8800, +0.1800, +0.2204%) , up from ¥81.66 on Friday.
Political unrest in the Mideast and North Africa has supported oil prices in recent weeks, but has failed to drive traditional risk-aversion buying in the U.S. dollar. When risk appetite takes a hit, investors tend to seek perceived safe-haven assets such as gold and low-yielding currencies like the U.S. dollar and Japanese yen.
“Although investors are concerned about political turbulence in the Middle East, they also think that the U.S. dollar may not be the best safe haven for these particular circumstances, given the U.S.’s exposure to higher oil prices and politics in the Middle East,” said analysts at Barclays Capital.
“Commodity currencies (especially the Canadian dollar) are a good hedge against oil-price inflation,” the analysts said.
“The Australian dollar with its large energy exports (coal and LNG) is also a reasonable hedge against higher energy prices in general,” they added.
Against the Canadian dollar, the U.S. dollar (USDCAD 0.9781, -0.0004, -0.0409%) fetched 97.79 Canadian cents, compared with 97.73 late Friday. The Australian dollar (AUDUSD 1.0165, +0.0018, +0.1774%) bought U.S. $1.0155, down 0.2%.
Interest-rate decisions are expected to support currency movements this week, with the ECB, the Bank of Canada and the Reserve Bank of Australia all slated to hold meetings.
The Australian central bank will be the first to meet Tuesday.
“The markets expect the Reserve Bank of Australia to remain on hold, which leaves the rhetoric in its accompanying statement in focus. With only one 25 basis-point rate hike almost fully priced by year-end, the risk is that the Reserve Bank of Australia’s rhetoric surprises on the hawkish side,” analysts at Barclays Capital said.
The European Central Bank is also expected to keep rates steady when it meets Thursday.
“We still view an immediate tightening as quite unlikely. The policy statement should signal further upside risks to the inflation outlook,” analysts at Credit Agricole said.
“We now look for the European Central Bank to hike rates twice in the second half of 2011, by 25 basis points in September and 25 basis points in December,” they added.
