The euro hit a two-month high against the dollar on Thursday after a eurozone policymaker expressed concern about inflationary pressures, further highlighting a policy divergence with the United States. The single currency also hit a two-month high against the yen, which fell broadly after S&P cut Japan's long-term debt rating to AA minus, saying the country's government lacked a coherent plan to tackle its mounting debt.
European Central Bank policymaker Lorenzo Bini Smaghi warned on Thursday that an expected rise in imported goods inflation cannot be ignored, supporting the view that eurozone rates could rise sooner than previously thought. The comments helped the euro extend earlier gains after a Federal Reserve statement the previous day gave no indication that it may back away from its loose monetary policy, contrasting with recent hawkish ECB rhetoric. "The ECB has started to show more concern about secondary price pressures, and the market has acknowledged that," said Gavin Friend, currency strategist at nabCapital.
The euro rose as high as $1.3756, Reuters data showed, its strongest since November 22, as it kept intact a strong uptrend from a four-month low below $1.29 hit earlier in the month. It later eased to $1.3726, up 0.2 percent on the day.
The euro pierced resistance around $1.3740, the 61.8 percent retracement of its two-month decline until early January. Technical analysts said a daily close above that level would add to the positive tone. The next target is the November 22 high of $1.3786 and some analysts say a break of this could prompt more gains towards $1.40. Against the yen, the euro rose to 113.88 yen, its strongest since November 22, up around one percent on the day.
Falls versus the euro and more negative dollar sentiment after the Fed statement helped push the dollar index down 0.4 percent to an 11-week low of 77.594.
Although Japan's fiscal troubles are well known, analysts said the ratings cut called into question the yen's status as a safe-haven currency, boosting the appeal of the dollar and the likes of the Swiss franc. The dollar was up 0.8 percent at 82.95 yen. It earlier rose more than 1 percent to 83.20, briefly trading above its 55-day moving average around 83.08.
Traders said offers between 83.10 and 83.30 yen may cap gains, with reported stops placed above 83.30 yen and an options expiry at 83.00 yen. Implied option volatilities for dollar/yen briefly jumped on the S&P downgrade but ended the morning little changed, with the one-month steady around 9.60. Other currencies may also be better-placed, particularly the Swiss franc, which may now be the favoured safe-haven currency. It hit a high around 88.13 yen, its strongest since April 2010.