The euro fell on Thursday after the European Central Bank kept its 2012 inflation forecast unchanged, suggesting the pace of euro zone interest rate hikes may be slower than previously thought. ECB President Jean-Claude Trichet did signal that the benchmark refinancing rate, now at 1.25 percent, would rise next month. But markets expected as much and had already priced in the prospect of a July hike.
Investors sold the euro after the ECB said inflation would hold at 1.7 percent in 2012, lower than analysts had expected. Investors now expect 75 basis points of tightening over the next year, from around 80 basis points before Trichet spoke. Greece worries also weighed on the euro after Moody's said it would be tough to imagine private creditors participating voluntarily in a debt restructuring.
The euro fell 0.5 percent to $1.4511, and Ruskin said $1.4450 was a reasonable short-term target. Against the yen, the euro was unchanged at 116.53, while the dollar rose 0.4 percent to 80.28 yen. Sterling fell 0.2 percent to $1.6366 after the Bank of England kept rates at record lows. The euro initially rose above $1.46 after Trichet said "strong vigilance" was warranted to curb inflation in the 17-country eurozone but then abruptly fell, triggering automatic sell orders at $1.4600, $1.4550, and $1.4500. Investors have come to view the words "strong vigilance" as Trichet's way of signalling a rate increase the following month.
The last eight times Trichet used those words, the euro appreciated in the 72 hours that followed, analysts said. "Trichet uttered the fateful code words 'strong vigilance,' preparing the market for further tightening," said GFT Forex research director Boris Schlossberg.