The euro failed to retest a recent four-year peak against the dollar on Wednesday, and analysts said persistent worries about the fiscal health of several eurozone countries may limit further gains. The euro hit a four-month high above $1.40 this week as markets began pricing in an April eurozone interest rate hike. But it retreated a day ago amid concern about the ability of indebted countries to withstand higher borrowing costs.
The currency last traded at $1.3904, unchanged from late Tuesday. It bounced off technical support in the $1.3860 area but was still off the day's high of $1.3942. In an auction Wednesday, Portugal saw its cost for issuing two-year debt soar to its highest level since it joined the euro in 1999, underscoring fears that it will need a bailout.
If the European Central Bank lifts interest rates, it could impair the ability of countries such as Portugal, Greece and Ireland to boost growth. ECB President Jean-Claude Trichet signalled last week that the bank could hike rates in April. "I don't trust the euro," said Richard Franulovich, senior currency strategist at Westpac. "The ECB is playing a dangerous game here and could end up forcing Portugal and Spain into the arms of (the euro zone rescue fund). I don't think it's a coincidence that spreads are blowing out again."
The ECB's Axel Weber acknowledged Wednesday that peripheral countries will undergo a painful adjustment process but said the future of the euro was not at risk. The dollar edged up 0.1 percent at 82.70 yen. Fund managers have been dollar buyers in recent weeks, according to UBS, although the bank said choppy US yields have limited gains against the yen lately.
Sterling rose 0.2 percent to $1.6203 while the New Zealand dollar slipped 0.3 percent to $0.7366 after the central bank cut interest rates by 50 basis points. The 17 eurozone heads of state are expected to agree at Friday's summit on the next steps to quell the region's debt crisis, though markets expect a major announcement to wait until a March 24-25 meeting of all 27 European Union leaders.
Still, the euro is seen supported by favourable interest rate differentials, with many expecting the ECB to retain a hawkish bias despite the debt problems in peripheral member nations. That is in sharp contrast to US monetary policy which looks set to remain loose for some time.