The euro rose against the dollar and yen on Thursday as European Central Bank President Jean-Claude Trichet's hawkish comments on inflation raised the specter of an interest rate hike in the euro zone.
The single currency also got a boost from an improvement in risk appetite, with US stocks ending higher after US President George W. Bush announced plans aimed at slowing the tide of homeowner foreclosures and shield the economy from the subprime mortgage crisis. An estimated 1.2 million homeowners could benefit from the assistance plan to avoid foreclosure over the next couple of years, according to Bush.
"We had more hawkish comments than expected from the ECB president. That really kicked it off. He (Trichet) down played the risks to growth and focused on inflation. That's what caught a lot of people off guard," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.
The ECB left its benchmark interest rate steady at 4 percent, but Trichet warned of "strong upward pressure" on inflation, adding that some central bank governors had favoured a rate increase.
In late afternoon New York trade, the euro was trading up 0.2 percent at $1.4630, after touching a session high of $1.4652. The euro also rose against the yen, climbing 0.5 percent to 162.75. Against the yen, the dollar rose 0.3 percent to 111.22, lifted by firmer US stocks, but lost ground against the high-yielding Australian and New Zealand currencies.
Before the ECB's rate decision, financial markets had expected the bank would not raise rates at all during 2008, with a significant minority forecasting a cut. "The other major (factor) is the yen crosses, all positive along with US equities and this is based on the further feeling that the situation in the US overall is improving, part of it was the subprime rescue plan," Dolan said.
The dollar, which had traded higher prior to the ECB rate verdict, was also held back as traders became cautious ahead of November's non-farm payrolls report on Friday, analysts said.
They reckon the jobs data could determine whether the Federal Reserve cuts its benchmark overnight lending rate by just 25 basis points to 4.25 percent or by half a percentage point next Tuesday. The surprisingly stronger reading from the US ADP private sector jobs report buoyed the dollar on Wednesday and handed the euro its biggest one-day drop since July 2006.
Sterling earlier fell to a fresh two-month low versus the dollar after the Bank of England cut rates by 25 basis points to 5.50 percent. It reversed losses to last trade 0.1 percent higher at $2.0262, as traders speculated that the step might not be followed by further monetary easing for a few months, with BoE's statement viewed as balanced.
The BoE cut follows a surprise easing from Canada on Tuesday, suggesting that the economic fallout from the US subprime mortgage crisis and the subsequent credit crunch is not limited to the United States.
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