The euro was on the defensive on Friday after European Central Bank President Jean-Claude Trichet poured cold water on expectations for a near-term rate hike, wrongfooting bulls who had expected more tough talk on inflation. Whether the euro's retreat from a 12-week high will continue now hinges on US job data due later in the day, with a break of support around $1.3535-70 seen as a potential sign of more losses down the road.
Trichet, speaking after the ECB's decision to keep rates at a record low 1 percent on Thursday, said inflation expectations remain "firmly anchored" and inflationary pressures over the medium to long term "should remain contained". The euro traded at $1.3625 after falling 1.2 percent the previous day, moving further away from a 12-week peak of $1.3862 set on Wednesday. On charts, the euro is now clutching at support from an Ichimoku cloud top at $1.3626.
More supports lies at $1.3570, this week's low, and $1.3535, which was resistance for the currency last month before a break there turned it into support. "I think the market's expectations of ECB rate hikes had gone a bit too far," said Ayako Sera, a market strategist at Sumitomo Trust and Banking Corp. Trichet's comments prompted eurozone interest rate futures to reflect a rolling back of expectations of a rate increase by August to around 80 percent from fully pricing it in before.
The dollar index showing its value against a basket of currencies rebounded sharply on Thursday but moved little on Friday at 77.74, off a 12-week low of 76.881 hit earlier this week. The dollar was little changed against the yen at 81.61 yen, drawing little help from a rise in US bond yields - a sea change from last year when the pair closely tracked US debt yields. The Aussie rose as high as $1.0196, not far from a 28-year high of $1.0257 hit last year.
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