LONDON: The dollar outpaced the euro Wednesday as both currencies benefited from speculation that US and European interest rates will rise soon to tackle rising inflation. The yen was the main loser as a result, falling back sharply to see the euro hit a 10-month high against the Japanese unit. In late London trade, the dollar rose to 83.00 yen from 82.46 yen late Tuesday while the euro slipped to $1.4094 from $1.4110. The European single currency was at 116.99 yen, up from 116.35 yen after hitting 117.27 yen, its highest point since May 13, 2010. The euro and dollar rose against the yen as European and US central banks talked of hiking their interest rates, said Philip Wee, senior currency economist for DBS Group Research in Singapore.
"Basically it's a reflection of the sequencing of the G7 (Group of Seven) central banks' rate hikes. Right now the ECB (European Central Bank) is the one that is ahead, and then the Fed, (where) I think there's a debate going on," he told AFP.
"Right now, in terms of the advanced economies, Japan is basically way behind in terms of the hikes." On Tuesday, St. Louis Federal Reserve President James Bullard said the US Federal Reserve could not keep its very loose monetary policy, echoing a similar statement from the head of the Philadelphia Fed. ECB president Jean-Claude Trichet hinted very strongly at the beginning of March that it would raise interest rates at its April meeting. This backdrop meant the euro was able to cope with bad news on the eurozone debt crisis front, with fresh ratings downgrades for struggling Portugal and warnings that Spain and Greece would not meet their deficit reduction targets. Portuguese benchmark 10-year bond yields topped 8.0 percent, continuing to edge higher as the markets bet Lisbon will be forced to seek outside help. Yields or the rate of return, above six percent are very high and above seven percent are widely viewed as unsustainable for the long-term. Ireland meanwhile reports Thursday on the health of its stricken banking system, with the markets expecting the results to show that the government will have to put up even more money to keep the lenders afloat. Michael Hewson at CMC Markets said such developments "have been more than offset by these higher interest rate expectations." A strong private sector US jobs report also helped the dollar.
"The ADP payroll survey estimates that private employment increased by 201,000 in March, adding to the evidence that conditions in the labour markets are finally beginning to show some meaningful signs of improvement," said Paul Ashworth of Capital Economics. In London trading late Wednesday, the euro changed hands at $1.4094 against $1.4110 in New York late Tuesday, at 116.99 yen (116.35), £0.8789 (0.8814) and 1.2993 Swiss francs (1.2984). The dollar stood at 83.00 yen (82.46) and 0.9219 Swiss francs (0.9201). The pound was at $1.6036 (1.6007). On the London Bullion Market, the price of gold rose to $1,425.50 an ounce from $1,417.50 late Tuesday.
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