Euro slips as Fed comments prop up dollar

LONDON: The euro drifted lower against the dollar on Tuesday after fresh comments by a Federal Reserve official suggesting the United States' loose monetary policy may be coming to an end. In London late afternoon trade, the European single currency fell to $1.4082 from $1.4092 in New York late on Monday. The dollar rose to 82.41 yen from 81.71 yen. The dollar got a boost from St. Louis Federal Reserve President James Bullard, who speaking in Prague, echoed comments last week by Philadelphia Fed President Charles Plosser that the US could not keep its very loose monetary policy forever. Bullard also suggested that the Fed could cut short its exceptional measures to help the world's largest economy, stopping at $100 billion below the $600 billion target of its bond-buying programme known as quantitative easing.

"Fed members are prepping the market for the end of quantitative easing and this continued, (with) Bullard who said that growth prospects had improved recently and that 'the natural debate is how and when the exit should begin,'" said Forex.com analyst Kathleen Brooks. Despite continuing concerns about the eurozone debt crisis, the euro has been supported by expectations that the European Central Bank will next week raise its benchmark interest rate from the current record low of 1.0 percent to combat inflationary expectations. However, traders are on tenterhooks ahead of publication of the results of so-called stress tests on Ireland's four biggest banks.

"Concerns about the European banking system are also weighing with the results of the latest batch of stress tests expected to have an effect with Irish banks expected to find out how much extra cash they will need," said CMC Markets analyst Michael Hewson. The Central Bank of Ireland will publish the results on Thursday amid ongoing tensions over the eurozone debt crisis and stubborn concerns over a potential bailout of debt-laden Portugal. On Tuesday, Standard & Poor's downgraded its credit ratings on struggling Greece and Portugal, saying that investors in their bonds could lose out under the terms of a new eurozone bailout system. S&P cut Portugal by one notch to BBB-, having slashed its rating only last week on fears Lisbon would have to seek a bailout after the government fell when parliament rejected austerity plans aimed to balance the public books. Greece was cut by two notches to 'BB-,' with both countries now hit by a series of downgrades in the past few months as the money markets bet that they will have to restructure their debt at the expense of investors. In the markets, the ratings downgrades had an immediate impact, pushing up the yield or rate of return for investors on Greek benchmark 10-year bonds to 12.568 percent from 12.499 percent on Monday. Portuguese rates rose too, to 7.881 percent from 7.818 percent, having hit a record high of 7.97 percent shortly after the announcement. Rates on 10-year bonds above 6.0 percent are considered exorbitant, and unsustainable above 7.0 percent, meaning both countries face huge problems if they have to raise fresh cash to cover maturing debt. Sterling meanwhile drifted lower despite a modest upward revision to British gross domestic product data for the fourth quarter of last year. The economy shrank by 0.5 percent between October and December compared with the third quarter, official data showed. That compared with the prior estimate of a deeper 0.6-percent contraction. In London trading on Tuesday, the euro changed hands at $1.4082 against $1.4092 in New York late Monday, at 116.02 yen (115.16), £0.8815 (0.8809) and 1.2974 Swiss francs (1.2911). The dollar stood at 82.41 yen (81.71) and 0.9213 Swiss francs (0.9161). The pound was at $1.5974 (1.5996). On the London Bullion Market, the price of gold edged up to $1,417.50 an ounce from $1,417 late Monday.