The euro rallied strongly to a fresh four-month high against the US dollar on Thursday, edging toward the psychologically important $1.40 level, after European Central Bank President Jean-Claude Trichet cemented expectations of a near-term interest rate rise.
In a press conference after the ECB left its benchmark rate steady at 1.0 percent, Trichet said the bank will exercise "strong vigilance" over rising inflation, a phrase that in the past signalled a rate rise was only a month away. "The market was expecting hawkish comments, but I think the opening up of the door to a hike as early as the next meeting is what's really propagated this, so you're seeing the euro appreciate across the board," said Firas Askari, head of FX trading at BMO Capital Markets in Toronto.
"How sustainable this is really a question mark. He did say he's not expecting a series of rate hikes," he said, adding: "I'm not a long-term buyer of the euro." The euro climbed as high as $1.3976 on trading platform EBS, its strongest level since early November, after rising above resistance around its 200-week moving average at $1.3958. It last traded at $1.3963, up 0.7 percent on the day.
Analysts said the euro is set to remain supported ahead of the ECB's next meeting in early April, but they added that the currency is likely to run into strong resistance in the $1.40 area and a rise above could attract fresh selling interest. "I'm very alert right now for some potential profit-taking," said Brian Dolan, chief currency strategist at Forex.com in Bedminster in New Jersey.
Trichet's comments that the ECB would carry on providing unlimited funding at its three-month operations for the next three months also suggests "there's ongoing fragility in the European banking sector," Dolan added. The strong indication that a rise will come in April put the ECB in pole position to hike well before the US Federal Reserve and even the Bank of England, which analysts had expected to move first.
The euro jumped as high as 114.99 yen on EBS, also the highest since early November. It rose 1 percent to 85.75 pence and was up 1.5 percent at 1.3000 Swiss francs. The dollar rose 0.6 percent to 82.36 yen, getting a lift after data showed new US claims for unemployment benefits fell last week to their lowest level in more than 2-1/2 years.
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