Euro rallies versus dollar in London

The euro rallied to its highest against the dollar in more than two months on Tuesday, boosted by signs that increasing inflation pressures will prompt a much faster rise in eurozone than US interest rates. The Australian dollar also hit a four-week high against the dollar, buoyed by upbeat central bank comments, while strong UK data lifted sterling to a 2-1/2 month maximum, driving the US currency to its lowest since early November against a basket of currencies.
Traders said demand from Middle Eastern investors helped lift the euro, while Asian sovereigns were also seen buying back euro positions sold earlier in the day, as well as buying Australian dollars. Investors now widely expect the Federal Reserve to lag far behind other central banks - notably the European Central Bank and the Bank of England - in raising interest rates.
The euro rose as high as $1.3776, its strongest since late November, before edging back to $1.3737, up 0.4 percent on the day. Implied interest rate futures suggest a nearly 80 percent possibility the ECB will raise rates by 25 basis points in August from the current record low of 1.0 percent.
Speculation that rates will rise has kept the two-year yield spread between German and US government bonds at around 80 basis points, its widest in two years. "Relative rate spreads are still favouring the euro to the dollar," said John Hydeskov, currency strategist at Danske. The euro broke above $1.3740, around the 61.8 percent retracement of its November-January fall, which technical analysts said provided support and may open the way to $1.40.
The US currency slipped to a four-week low around 81.47 yen, also helping to push the dollar index, which tracks the US currency's value against a basket of other currencies, as low as 77.294, its weakest since early November. The Australian dollar rallied 1 percent on the day to a four-week high of $1.0080 after the country's central bank ended its monthly policy meeting with a generally upbeat assessment of the domestic and global economy.
Sterling jumped to a 2 1/2-month high of $1.6143 after UK manufacturing PMI hit a record high in January, adding more evidence that the sector is expanding while price pressures build, feeding the argument for a UK rate rise by mid-year. The Swedish crown also rallied, knocking the euro to a 10-year low of 8.786 crowns, after an above-forecast Swedish purchasing managers' survey.