The dollar rallied from record lows against the euro on Monday after European Central Bank President Jean-Claude Trichet expressed concern about the swift pace of the euro zone single currency's recent climb. Trichet, speaking after a meeting of central bankers in Basel, said the euro's recent advance was "brutal" and unwelcome, echoing comments he made in February when the euro hit a then-record high of $1.2927.
Earlier Monday, before Trichet spoke and before traders had started taking profits, the euro had hit a fresh record high just below the psychologically important level of $1.30.
A stronger euro shields the euro zone from high oil prices but makes its exports more expensive.
"It was Trichet's comments earlier today that really got the ball rolling on euro/dollar," said Ken Landon, global currency strategist at J.P. Morgan Chase in New York.
"Plus, some of the shorter-term players are clearing up their positions. So we have very good support at $1.29-$1.2910. But the longer-term players are looking to buy dips in euro/dollar, so that's why we didn't have a collapse," he said.
Traders also said the dollar may just bounce around in narrow ranges until Wednesday, when the Federal Reserve announces its interest rate policy decision and the government releases September's trade data, dealers said.
By late afternoon in New York, the euro was at $1.2917, down 0.36 percent on the day, according to Reuters data, after hitting a record high of $1.2985 earlier in the global day.
Analysts, however, said the level at which the European Central Bank might actually intervene in the market is far down the road.
"You would have to see the euro push above $1.35 for (the ECB) to really contemplate intervention," said Monica Fan, global head of foreign exchange strategy with RBC Capital Markets.
Even then, the ECB would likely have to find support among G10 finance ministers and would have to act in concert with other central banks, Fan said.
The dollar traded slightly lower against the yen at 105.48 yen, having fallen to its lowest since April at 105.30.
Against the Swiss franc, the dollar was up around 0.3 percent at 1.1811 Swiss francs. Sterling, meanwhile, was nearly flat at $1.8560.
Analysts believe sentiment on the dollar remains bearish owing to deep-seated concerns over the US current account and budget deficits.
The US budget deficit is about $427 billion, or 3.7 percent of gross domestic product, while the current account, the broadest measure of trade, chalked up a record $166.18 billion shortfall in the second quarter.
"I think sentiment is still overwhelmingly bearish here for the dollar," said Hugh Walsh, vice president of foreign exchange with Fortis Bank in New York.
As markets digested the euro's surge to fresh record highs on Monday, traders are focusing on the Federal Open Market Committee meeting on Wednesday.
The Fed is widely expected to raise interest rates by a quarter percentage point to 2 percent, but most dealers are watching out for the accompanying statement to determine the pace of future rate rises. Ahead of that meeting, traders said investors wanted to maintain neutral currency positions.
"Ahead of an event like a Fed meeting, it's always important to unwind some of your positions whether short or long and move to a more neutral position," said Ashraf Laidi, chief currency analyst at MG Financial in New York.
"But it doesn't alter the big picture on the dollar," he added.
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