The dollar hit a 4-1/2 month high versus the euro on Tuesday after Federal Reserve Chairman Alan Greenspan said the threat of deflation in the United States was over, reinforcing market expectations that interest rates will rise.
Greenspan told the Senate Banking Committee, in response to a question, that deflation was no longer a threat and that he is optimistic on the US economy and sees job gains ahead.
"At least short-term this will be a plus for the dollar," said Rebecca Patterson, currency strategist at J.P. Morgan Chase in New York.
"Medium-term, however, implications of Fed tightening are much less dollar-supportive. Past Fed tightening cycles have begun with lower US equities and a weaker US dollar. The dollar should enjoy its time in the sun now," she added.
The dollar benefits when US rates rise because global investors searching for higher yielding assets boosts demand for the greenback.
The euro's fall was a slow grind lower on Greenspan's comments, taking it to a low of $1.1844 before it climbed back to $1.1857, still a loss of 1.28 percent on the day, according to Reuters data. The move broke the 200-day moving average support level at $1.1919.
Earlier, the euro fell after a weaker-than-expected German ZEW research institute economic expectations indicator dropped to 49.7 in April against a consensus forecast for a rise to 58.0 from March's 57.6.
This raised speculation that anaemic growth in Europe might prompt the European Central Bank to cut interest rates.
However European Central Bank members, who sit on the interest rate policy-setting Governing Council, said later on Tuesday that the ECB's outlook for accelerating growth in 2004 and 2005 was intact and historically low interest rates were in line with that assessment.
The policy-makers indicated the central bank was ready to act on interest rates if economic prospects changed.
Benchmark US rates are 1 percent, versus 2 percent in the euro zone.
Elsewhere in the market, the euro fell 0.93 percent to 128.94 yen. A recovery in Japanese stocks also put selling pressure on the euro.
The dollar rose in late afternoon New York trade to 108.75 yen, a gain of 0.36 percent.
The dollar rose to a near five-month high of 1.3144 Swiss francs, before easing back to 1.3130 francs still a gain of 1.80 percent on the day. The dollar broke above the 200-day moving average resistance point of 1.3070 francs.
Sterling dropped 1.23 percent to $1.7855 hit by weaker-than-expected UK consumer prices.
The US dollar hit a high of C$1.3579 against the Canadian dollar before easing back to C$1.3568 up 0.95 percent.
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