Euro falls broadly

The euro fell broadly on Thursday and could extend those losses after European Central Bank President Jean-Claude Trichet threw cold water on expectations eurozone interest rates would rise any time soon. Trichet, speaking after the ECB's decision to keep rates at a record low 1 percent, said inflation expectations remain "firmly anchored" and inflationary pressures over the medium to long term "should remain contained."
His comments disappointed investors who had expected a more hawkish statement after recent inflation data came in above forecast. Expectations the ECB would lift interest rates sooner than the Federal Reserve had boosted the euro in recent weeks. The euro fell more than 2 cents on the day, moving further away from a 12-week high of $1.3862 set on Wednesday. It was last down 1.2 percent at $1.3633. Traders said support now lies at $1.3570, this week's low, and a break would open the door for a slide below $1.35.
"Trichet failed to deliver on expectations for a hawkish statement," said Richard Franulovich, senior currency strategist at Westpac in New York. "He merely repeated what he said in January, which is that inflation risks are balanced but could move to the upside. The markets were clearly looking for something more aggressive than that."
Interest rate futures imply an 80 percent perceived chance of a 25-basis-point ECB rate increase by August. Before the meeting, the market was fully pricing in a hike by then. The spread between German and US two-year bond yields narrowed to 69 basis points from around 75.
"The market has rightly interpreted Trichet's comments as a sign that the prospect of a near-term rate hike is still premature," said Frederik Ducrozet, an analyst at Credit Agricole, in a note. "That said, it is very likely, in our opinion, that the ECB staff of economists will revise GDP and inflation projections upwards next month based on recent data and oil price dynamics."
The euro lost 1.2 percent to 111.22 yen and traded sharply lower versus the Swiss franc and sterling. The dollar was unchanged at 81.58 yen, while an index measuring the dollar against a basket of six currencies, rose 0.8 percent to 77.773, rebounding from a 12-week low set on Wednesday.
Federal Reserve Chairman Ben Bernanke said Thursday that despite improved US economic data, the economy needs help from the central bank. Still, expectations the recovery is taking hold pushed US 10-year Treasury yields north of 3.55 percent, above a range that has held solidly since mid-December. Higher bond yields make dollar-denominated assets more attractive.