The euro took a breather in its explosive rally ahead of influential US jobs data on Friday, but the single currency is set to stay in demand after the European Central Bank signalled it may raise interest rates as early as next month. While the ECB had been expected to step up its anti-inflation rhetoric, nobody actually thought ECB President Jean-Claude Trichet would explicitly say an interest rate rise at the next meeting was possible.
"The market was unprepared for Trichet to lay the foundation for an April rate hike," said David Watt, strategist at RBC Dominion Securities. Euro interest rate swaps soared across the curve with the two-year rate hitting 2.30 percent, highs not seen since early 2009.
The euro jumped to its highest in about four months of $1.3976 on trading platform EBS on Thursday and last traded at $1.3960, down 0.1 percent from late US trade on Thursday. "We think the euro will remain strong in the next week or two, possibly even testing...highs of $1.4280," said Christopher Gothard, head of FX for Brown Brothers Harriman in Hong Kong, referring to the euro's next major peak on charts, its early November high of $1.4283.
Against the yen, the common currency eased 0.2 percent to 114.93 yen, hovering near a four-month high of 115.18 yen hit on EBS on Thursday. Having taken out resistance around 114.01, the late January high that had capped the euro in February, the single currency now looked poised to test 115.68, the early October high, said Watt at RBC Dominion Securities.
In a sign of its broad strength in the wake of Trichet's comments, the euro hit a 10-month high against the New Zealand dollar of NZ$1.8935 on Friday and touched a five-week high versus the Australian dollar near A$1.3800. The euro held steady against the Swiss franc at 1.3007 franc after having surged 1.6 percent on Thursday for its biggest one-day percentage gain since last September.
"We see scope for rates to go up significantly further this year, beyond the hike now widely expected in April," said Kenneth Wattret, analyst at BNP Paribas. Strength in the euro kept the dollar stuck near a four-month low against a basket of major currencies. The dollar index was steady at 76.457, hovering near Thursday's trough of 76.385, which was its lowest since early November. The dollar dipped 0.1 percent against the yen to 82.34 yen, having rebounded after repeated tests of levels around 81.60 in the past few sessions failed to break new lows.