Federal Reserve comments limit losses for U.S. dollar
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The U.S. dollar gave up gains against the euro on Monday following European Central Bank President Jean-Claude Trichet’s comments about inflation expectations and competitiveness in the euro zone.
Expectations for higher interest rates in Europe are insulating the continent’s 17-nation shared currency from ongoing worries about a potential bailout of Portugal, question marks hovering over Irish banks and German Chancellor Angela Merkel’s political headaches.
The dollar index (DXY 76.06, -0.16, -0.21%) , which measures the U.S. unit against a basket of major rivals, stood at 76.088, down from as high as 76.435 and off from 76.242 in North American trading late Friday.
The euro (EURUSD 1.4109, +0.0063, +0.4485%) turned up to $1.4098, recovering from $1.4020 earlier and higher than $1.4068 late Friday,
The British pound (GBPUSD 1.6016, +0.0013, +0.0812%) reversed a decline to buy $1.6024, from $1.6020 Friday.
Against the Japanese yen, the dollar (USDYEN 81.6400, +0.3000, +0.3689%) rose to ¥81.65 from ¥81.46 Friday.
In other currency activity, the Australian dollar (AUDUSD 1.0274, +0.0032, +0.3124%) jumped to its highest level on the greenback since it was allowed to float freely in 1983.
Trichet’s comments helped reinforce expectations that the European Central Bank will raise interest rates as soon as next month, analysts said.
“Trichet reaffirmed that a rate hike is coming in April and that helping to create a small bid for now,” said Boris Schlossberg, director of currency research at GFT.
Adding complexity to complications
However, politicians’ willingness and ability to resolve Europe’s sovereign-debt problems came under more pressure over the weekend.
On Sunday, Merkel’s Christian Democratic Union party suffered a historic defeat in a state election in Baden-Wuerttemberg, which the party had ruled since 1953. Germany has Europe’s largest economy. Read about German election.
Kit Juckes, head of forex research at Societe Generale, said the election results were “more of a catalyst for the euro/U.S. dollar slippage than a cause, in the sense that the euro had run out of momentum and short-dollar positioning was excessive.”
The upside remains favorable for the euro in the medium term, but a test of the $1.3970 level is likely to happen first.
