Euro hits record peak

The euro hit a record high versus the low-yielding yen and a two-month high against the dollar on Thursday, as the European Central Bank kept interest rates on hold but is expected to pave the way for a rise soon. The ECB kept rates steady at 4.0 percent, as expected, but comments from ECB President Jean-Claude Trichet at his 1230 GMT press conference are expected to signal that rates will rise in the coming months.
Sterling, meanwhile, popped back above $2.02 after the Bank of England raised rates and signalled further tightening is on the cards. The strength of European currencies helped push the dollar down to its lowest level since January 2005 versus a basket of major currencies. "We expect (Trichet's) statement to prepare for monetary tightening which should be supportive for the euro," said Johan Javeus FX strategist at SEB Merchant Banking. Expectations of higher rates are boosting the euro and sterling versus the dollar and yen, with US rates seen on hold all year and possibly even cut, while Japanese rates will remain the lowest in the industrialised world even if the Bank of Japan does tighten monetary policy in coming months.
"Interest rate differentials are the key driver for the dollar. The ECB is likely to raise rates and the Fed will keep them on hold or could even cut," said the SEB's Javeus.
At 1200 GMT the euro was up 0.25 percent on the day at $1.3645, having earlier hit a two-month high of $1.3660. That's within sight of the all time high above $1.3680 struck at the end of April. The euro was trading around up 0.1 percent at 167.14 yen, slightly down from an all-time high of 167.30 yen set earlier in the day, according to Reuters data.
The dollar index fell to a two-and a half year low of 81.242 against a basket of currencies and was 0.1 percent lower on the day against the yen at 122.47 yen. Sterling was up 0.1 percent versus the dollar at $2.0186, less than half a cent away from a 26-year high set the previous session.
The BoE on Thursday lifted interest rates to 5.75 percent, their highest level since April 2001 and economists are forecasting a further hike by year-end. Trading was subdued but expected to pick up as US financial markets reopen after being closed the previous day for the Independence Day holiday.
The US Institute for Supply Management's non-manufacturing index for June is due at 1400 GMT, and investors are likely to focus on the employment component ahead of Friday's non-farm payrolls release. The ADP private sector employment report at 1215 GMT may also be of note. Analysts say the dollar's recent weakness means that the data was unlikely to have a big impact on the greenback.
"The fact that the USD index is already (sharply lower) argues against additional downward pressure unless there is a massive disappointment in the data," said Dresdner Kleinwort in a research note. The yen has suffered from Japan's 0.5 percent interest rate, the lowest among major countries, and the Bank of Japan's repeated pledge to raise rates only gradually.
The high-yielding Australian dollar edged set a 16-year peak at 105.39 yen, while the New Zealand dollar - which enjoys the highest interest rates in the industrialised world at 8.0 percent - set two-decade peaks at 96.18 yen. Traders said strong global stock markets in Asia overnight had encouraged investors to hold on to risky positions such as carry trades, in which low-yielding currencies such as the yen are borrowed to fund investments in higher-yielding currencies.