LONDON: The dollar clawed back ground against the euro on Tuesday as the markets took on board another Chinese interest rate hike and prepared for one in Europe against a backdrop of rising global inflation.
The European single currency on Monday hit a five-month high against the dollar, boosted by expectations that the European Central Bank will hike eurozone interest rates on Thursday.
On Tuesday, however, the euro fell to $1.4182 from $1.4220 in New York late Monday, when it briefly reached $1.4268 -- the highest level since November 4.
All eyes will Tuesday be on the Federal Reserve, which publishes the minutes from its policy meeting three weeks ago. The market will be looking for a hint on whether the US central bank is moving towards tighter monetary policy.
Fed officials have argued publicly that despite the soaring cost of fuel and food, "core" inflation is subdued, meaning that a rate hike is some way off.
"Although they believe that the price pressures are 'transitory', they are keeping an eye on them in case commodity prices resume their rise and drive up inflation expectations," said Kathy Lien of Global Forex Advisors.
"However, the market is still only pricing in a 55-percent chance of a rate hike by the Fed this year compared to a 100-percent chance of a rate hike by the European Central Bank on Thursday."
The ECB pushed rates to a record low 1.0 percent in May 2009 where they have remained since as the central bank pulled out all the stops to keep the European economy afloat amid the global financial crisis.
Meanwhile Tuesday, China hike rates by 25 basis points -- the fourth such move since late last year -- in its latest effort to curb rampant lending and bring inflation under control.
Beijing has been pulling on a variety of policy levers to rein in consumer prices and housing costs but inflation remains stubbornly high at 4.9 percent in February, well above the government's full-year target of four percent.
Chinese Premier Wen Jiabao said last month that reining in prices was the government's "top priority" in 2011 as the country strives for a more balanced eight percent growth rate.
Australia kept interest rates unchanged at 4.75 percent, in line with expectations, saying Tuesday a strong local currency was likely to help keep a check on inflationary pressures.
In London on Tuesday, the euro changed hands at $1.4182 against $1.4220 in New York late on Monday, at 119.52 yen (119.49), £0.8733 (0.8814) and 1.3090 Swiss francs (1.3127).
The dollar stood at 84.27 yen (84.03) and 0.9230 Swiss francs (0.9227).
The pound was at $1.6239 (1.6130).
On the London Bullion Market, the price of gold edged up to $1,435.88 an ounce from $1,435.50 late Monday.
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