The euro hovered near a five-month peak against the dollar and an 11-month high against the yen on Monday, with near-term strength seen limited as an expected eurozone interest rate rise was mostly priced in. The European Central Bank, at its policy meeting on Thursday, is widely expected to raise rates by 25 basis points from a record low to battle rising inflationary pressures in the eurozone. Two more 25-basis-point rate hikes are factored in by year-end.
Traders expect the euro to stay near current levels in the coming days, with resistance seen around $1.4281, the November high. The single currency could struggle to extend gains unless ECB President Jean-Claude Trichet sounds a surprisingly hawkish tone on inflation, analysts said. The euro last traded at $1.4217, down 0.1 percent. Bids from Asian central banks and other investors are likely to offer the euro solid support at $1.4190, with traders citing stops through to below $1.4150.
Traders also noted trendline resistance drawn from the euro's record high set in July 2008 coming in around $1.4300. Investors were in a wait-and-see stance, with a number of central bank rate decisions in the developed world and a slew of speakers from the US Federal Reserve later in the week.
The euro rose above 120 yen for the first time since May 2010 and was last at 119.47, down 0.1 percent. The dollar was flat at 84.03 yen. It hit its highest level since September on Friday on trading platform EBS, stalling ahead of an option barrier at 84.75. The pair rose above its 200-day moving average last week, signalling the downtrend may have run its course.
Dollar/yen's "inability to close above the December 2010 high on Friday at 84.51 and the failure to get above that level today are leading to profit-taking and modest selling for the pair," said Greg Michalowski, chief currency analyst at FXDD. Fed Chairman Ben Bernanke was scheduled to speak later on Monday. Recent Fed official comments have highlighted divergence and uncertainty over the outlook for US monetary policy.
Atlanta Fed President Dennis Lockhart said on Monday that while US inflation is likely to remain low for now, policymakers will keep a close eye on potentially self-fulfilling consumer expectations of higher prices. The yen hovered near recent lows against higher-yielding currencies such as the Australian dollar. Expectations of low Japanese rates have encouraged investors to borrow in yen and reinvest in higher-yielding assets in the so-called carry trades.
The Bank of Japan is likely to downgrade its economic assessment and keep policy ultra-loose on Wednesday. The Australian dollar traded at its highest since being freely floated in 1983. It slipped back to trade at 1.0361, down 0.3 percent on the day.