The euro outperformed most major currencies on Monday, with more gains likely over the near term, given that investors believe that tighter monetary policy by the European Central Bank is around the corner. ECB President Jean-Claude Trichet said on Monday inflation rates are durably above the central bank's price stability target.
The possibility of higher interest rates as early as next month softened concerns about Germany's ruling party losing a key state election. The euro gained after Trichet's comments. It was up 0.1 percent for the day at $1.4096 after sliding as much as 0.3 percent on the back of concerns about Chancellor Angela Merkel's loss. The euro, nevertheless, is off a 4-1/2 month high of $1.4249 hit last week on EBS. The euro also fared well against the yen, gaining 0.5 percent to 115.14. The dollar was up 0.4 percent at 81.64 yen with implied volatilities staying low, which traders said was ruling out the need for any further official yen selling intervention in the near-term.