The dollar fell to two-month lows on Tuesday, weighed by growing expectations the European Central Bank will raise interest rates next month as the Federal Reserve winds down its nearly two-year credit tightening campaign.
The euro also hit a record high against the yen and touched two-year highs against the Swiss franc after a news report overnight said the ECB may raise euro zone rates at its May meeting to 2.75 percent.
By late afternoon, the euro was at $1.2260, up 1 percent from late Monday. It had risen as high as $1.2277 during Tuesday's session, the highest since it reached a 2006 high of $1.2323 in January.
Against the yen, the euro rose 0.8 percent to 144.00 yen, hovering around its record high of 144.19 yen hit earlier in the session.
Market talk of a report from a US think tank predicting the Fed will stop raising rates when it gets to 5 percent accelerated dollar selling as traders anticipated the removal of what has been a major pillar of support for the US currency for more than a year.
"We are near a point this month that could see the early arrival of the weak dollar trade," said David Gilmore, partner with FX Analytics in Essex, Connecticut.
With the dollar's interest rate advantage over many major currencies possibly shrinking in the near term, Gilmore said the enormous US trade deficit could weigh on the greenback as it did during the currency's three-year decline from 2002 through the end of 2004.
The US trade deficit widened to a record $723.6 billion last year, nearly 6 percent of gross domestic product.
Despite the euro's broad gains, traders remained cautious that it could reverse course as quickly as it climbed, especially with a policy setting meeting of the ECB on Thursday and the March US payrolls report on Friday.
"Probably there will be an expansion of the current range that we've had - $1.19 to 1.22 - we could probably trade as high as $1.23, but before the payrolls (report) on Friday, I don't think we'll see too many more gains in the euro," said Tim Mazanec, senior currency strategist at Investors Bank & Trust in Boston.
The ECB is widely expected to leave rates on hold at its next policy-making meeting on Thursday but raise them a quarter-percentage point in May to 2.75 percent.
The Fed is expected to raise benchmark US interest rates another quarter-percentage point to 5 percent at its next policy meeting in May. But beyond that, economists say the outlook is less clear.
The euro slipped near the end of the session against the Swiss franc after climbing as high as 1.5857 francs. The dollar was modestly lower against the yen at 117.41 yen, down 0.2 percent.
Commodity currencies such as the Australian dollar and the Canadian dollar benefited as the price of gold edged closer to the psychologically important $600 per ounce.
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