The euro rose towards record highs versus the dollar on Friday after inflation-focused comments from a euro zone policymaker reinforced the view that European Central Bank is unlikely to cut rates any time soon.
Speaking after data from four German states pointed to a likely inflation pick-up in the euro zone's biggest economy and thus in the 15-nation bloc as a whole, ECB Governing Council member Axel Weber said price pressures were alarmingly high.
The ECB's focus on fighting inflation has made it more tolerant to a strengthening currency and is in sharp contrast to the stance of the US Federal Reserve, which has slashed rates by 300 basis points in the last seven months to boost growth.
The diverging interest rate paths and signs that the euro zone, at least for now, is proving resilient to a US-led economic slowdown helped push the euro to record highs above $1.59 last week.
With gains of over 8 percent since the start of the year, the currency is on track for its best quarterly performance since late 2004, and analysts say that further gains towards $1.60 could well be on the cards. "We had the comments from Weber, and also some high (German) inflation rates, so probably the trend for the dollar for the next couple of days is still down," said Marcus Hettinger, global FX strategist at Credit Suisse in Zurich.
"This week rather strong European data (is) enforcing the current hawkish stance of the ECB while the US data are very weak and point to another rate cut by the Fed," he added.
By 1057 GMT, the euro was up 0.2 percent at $1.5812, less than a cent below last week's historic peaks. The euro also set a record high against a sterling weighed down by weak UK housing data and growing expectations that the Bank of England cut interest rates again as soon as April.
The euro rose as high as 79.29 pence and was also up 0.6 percent at 158.16 yen. Atlanta Fed President Dennis Lockhart said on Thursday the economy may be slipping into recession and that the Fed must cushion the pain. This raised expectations of more rate cuts after the central last week slashed its benchmark lending rate by 75 basis points to a three-year low of 2.25 percent.
"Comments from the Fed overnight continue to paint a grim picture of the situation in the US and there's an increasing risk of the US moving into a recession," said Ian Stannard, senior foreign exchange strategist at BNP Paribas.
On the heels of data confirming that economic growth nearly slowed to a halt in the fourth quarter, other Fed officials said the US mortgage crisis is continuing to strangle consumer spending. US data due at 1230 GMT is expected to show that the core personal consumption expenditure price index, a widely-watched gauge of inflation pressures, rose just 0.1 percent in February. Proof of slowing price pressures would strengthen the case for the Fed to remain focussed on growth and thus to keep cutting rates.
Market participants said that the dollar may come under renewed selling pressure. Traders were on high alert for rumours of more troubles at US investment banks as the fallout from the credit crisis continues. The US currency had slipped in Asian trade on chatter that Lehman Brothers could suffer a fate similar to the near collapse of Bear Stearns, which hurt sentiment. Lehman called the rumours "totally unfounded".
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