Euro stumbles in New York

The euro stumbled on Monday after its recent rally against the dollar as sovereign debt worries returned, but expectations for higher euro zone interest rates should continue to favour the currency. The euro early in the day rose to a four-month high against the dollar above $1.40, but the gains faded as trading in London wound down and liquidity began to dry up in New York. The euro was last at $1.3975, down 0.1 percent on the day, according to Reuters data.
The euro remains up about 4.5 percent against the greenback year-to-date, largely on expectations the European Central Bank will raise rates well before the US Federal Reserve does so. European Central Bank President Jean-Claude Trichet surprised investors on Thursday by saying euro zone interest rates may rise as early as next month.
"It's been a long time since a major power raised interest rates, so just the thought that the ECB may raise interest rates is a big deal," said Chuck Butler, president of EverBank World Markets in St. Louis. He warned, however, that a possible rate rise "should not overshadow that the euro zone debt problems could be back if there is no resolution.
The latest data showed speculators' long euro positions at their highest level since January 2008. The data shows positions taken only until last Tuesday, two days before before Trichet spoke on Thursday. Greg Anderson, G10 strategist at CitiFX in New York, said the IMM data showed that the leveraged funds category is at an eight-month high in terms of participation in the FX market.
Meanwhile, sovereign debt concerns, which have been largely dormant in recent months, returned to the forefront as Moody's slashed Greece's debt rating by three notches and kept Greek debt on review for a further possible downgrade. Many economies in the 17-nation euro zone continue to struggle with low growth and high debt burdens. A euro zone leaders' meeting later this week may prove to be a test of the euro's resilience.
At the same time, the dollar's safe-haven appeal has been diminished despite ongoing geopolitical turmoil, hurt by the chance of an oil-driven jump in inflation and expectations that US interest rates will lag those in Europe. In an interview published on Monday, an ECB Executive Board member, Jose Manuel Gonzalez-Paramo, said an April rate increase was possible as the European Central Bank continues its effort to control inflation.
The ECB's stance contrasts sharply with that of the Federal Reserve, which is expected to keep monetary policy loose for some time. That reflects the Fed's greater concern with the US economic growth outlook than inflationary pressures. The dollar was nearly flat against the yen at 82.24 yen. The euro was down 0.1 percent against the yen at 114.95 and was up 0.1 percent at 1.2944 Swiss francs.