The euro dropped against the dollar on Thursday after European Central Bank President Jean-Claude Trichet said euro zone growth risks are to the downside, paving the way for lower interest rates this year. The euro is now on track for its biggest weekly decline against the dollar in two-and-a-half years.
It was pressured from early in the session as the ECB left benchmark borrowing costs unchanged at 4 percent and Trichet, at a post-meeting press conference, also dropped his threat to act pre-emptively against rising prices. The euro has come under pressure in the past couple of sessions amid growing signs the economy in the 15-member bloc is faltering. In another rate-setting meeting on Thursday, the Bank of England cut borrowing costs, citing a weak economic outlook.
"Trichet co-operated today and the market got what it wanted," said Joe Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey. "He said there are downside risks to growth and 4 percent rates allow for price stability. The market is saying the next move will be a cut."
In late afternoon New York trading, the euro was down 1 percent at $1.4474 after dropping as low as $1.4442. The euro has lost 2.25 percent this week, heading for its biggest weekly fall since August 2005.
The dollar also advanced against a basket of currencies, gaining 1 percent to 76.897, its highest level in about two weeks. "We're at a bit of a pivot point in the euro here, and if we can get and stay below the $1.4520 area I think that could open the flood gates a little more," said Steven Butler, director of FX trading at Scotia Capital in Toronto.
The dollar rose 1 percent against the yen to 107.44 yen, mostly on technical trading. "There has been talk of some semi-official buying interest of dollar/yen on the low 106 areas and the subsequent sharp rebound catching the market short," said Brian Dolan, chief FX strategist at Forex.com in Bedminster, New Jersey.
The euro was little changed at 155.59 yen though it had traded between a low of 154.06 and a high of 156.19. Sterling fell to a two-week low against the greenback at $1.9422 as the Bank of England cut rates by a quarter percentage point to 5.25 percent, as expected, in a bid to head off a sharp consumer-led slowdown, and signalled further gradual policy easing ahead.
In contrast to the United States, Canada and Britain, the ECB has not yet gone down the path of cutting interest rates because of price pressures in the 15 countries using the euro. In January, euro-zone inflation hit a record high.
Recent signs of faltering growth in Spain, Italy and elsewhere in the bloc, however, suggest the ECB may soon have to switch its attention to supporting the euro zone economy.
Reports showing US weekly jobless claims benefits fell last week and that pending sales of previously owned homes slid a steeper-than-expected 1.5 percent in December had little impact. The US Federal Reserve has already slashed rates by 225 basis points and is seen cutting rates at least another 75 basis points by the end of the year.
Going into the weekend, investors may be looking to any currency-related comments from the meeting of Group of Seven finance ministers and central bankers in Tokyo. A G7 source told Reuters the wording of this weekend's communique is not yet finalised with regards to foreign exchange but no change is expected from the text of the last meeting in October.
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