By Deborah Levine and Virginia Harrison, MarketWatch
NEW YORK (MarketWatch) — The euro extended gains against the U.S. dollar Thursday after a report showed that inflation in the euro zone rose more than analysts expected, boosting expectations that the European Central Bank will raise interest rates.
Still, traders awaited stress-test results of the Irish banks, which are expected to need more financial support. Read more about Irish banking sector.
The euro (EURUSD 1.4177, +0.0049, +0.3468%) topped $1.42 after the euro-zone data, then slipped back to $1.4172, still up from $1.4128 late Wednesday.
The dollar index (DXY 75.92, -0.20, -0.26%) , which measures the U.S. unit against a basket of major currencies, fell to 75.950 from 76.091 in late North American trading Wednesday.
The European Union statistics agency Eurostat said inflation in the euro zone rose at a 2.6% annual rate in March, up from February, and higher than economists expected. It also pushed the rate further above the ECB’s target, which is near, but just below, 2%.
Traders had already been expecting the ECB to raise interest rates next week, as many officials have been vocal about the need to cap energy-based price increases.
The data “will be seen as providing ammunition for hawkish expectations further ahead as the market flirts with the idea of more than one rate hike this year,” said Lena Komileva, global gead of G10 strategy at Brown Brothers Harriman.
The dollar pared losses after the U.S. Labor Department said first-time jobless claims fell to 388,000 in the latest week. That was still a higher level than economists had expected because the prior week’s numbers were revised higher. Read story on jobless claims.
The extent of the Irish banking crisis will revealed later Thursday with the results of the government stress tests on its banks.
Reuters forecast the amount of additional capital needed by the ailing banking sector will be in the range of €18 billion to €23 billion ($25.5 billion to $32.6 billion).
“Given that there is a €35 billion provision for bank recapitalization within the existing European Financial Stability Facility bailout, such news is likely to be greeted with relief, providing that the tests are seen to be reasonably transparent and credible,” BNP Paribas strategists said.
Aussie hits new high
During Asian trading hours, the Australian dollar hit a 29-year high against the U.S. currency, helped by better-than-expected monthly retail trade data. Read more about Australia’s February retail sales report.
The Australian dollar (AUDUSD 1.0334, +0.0016, +0.1551%) hit $1.0346, its highest point since the currency was floated in 1983.
The Aussie later eased a bit to $1.0323, little changed from $1.0324 late Wednesday.
The dollar (USDYEN 82.8200, -0.0700, -0.0844%) weakened against the yen to ¥82.77, from ¥82.87 late Wednesday.
The euro (EURYEN 117.4300, +0.3200, +0.2732%) edged higher against the Japanese currency, buying ¥117.27, up from ¥117.05.
On Wednesday, the dollar rose to its highest level since the March 11 earthquake and tsunami, events that led to central banks around the world intervening in concert to weaken the yen. Read about dollar, yen.
“The yen has proved able to break clear of its post-Group-of-Seven-Nation intervention highs and is rapidly becoming the carry-trade funding vehicle of choice,” the BNP strategists said.
