Euro hits three-week high

The euro hit a three-week high against the dollar on Tuesday, boosted by comments from a German think-tank that eurozone interest rates would soon rise. That helped drag the US unit down to a one-month low against a basket of six major currencies.
Wolfgang Franz, the president of the ZEW economic research institute, said that he thought the European Central Bank will raise rates soon, even as a survey on investors' morale by the institution unexpectedly worsened for the second straight month.
The ZEW's gauge of expectations for Germany fell to -41.4 in May from -40.7 in April. Click on. Despite his remarks about an ECB rate rise, Franz said that stellar German economic growth seen in the first quarter would not continue.
The euro was initially pressured by the weak ZEW reading, but then shot up on Franz's rate comment. Analysts said the move reflected market uncertainty about the ECB's rate outlook, given that the economy is slowing amid persisting inflation risks.
"Even though the number wasn't fantastic, the ZEW president is saying that the ECB is going to raise rates in the near future," said Paul Mackel, director of currency strategy at HSBC Markets. "The fact that the euro has responded to contrasting signs highlights the current sentiment."
The euro was also supported by a rise in German producer price inflation to a 20-month high, which added to the argument that the ECB may hike rates from the current 4 percent later in the year The euro climbed a full percent to $1.5674, clocking its highest level since late April.
The dollar weakened across the board, falling against a basket of currencies as euro gains added to downward pressure in the currency due to persistent jitters about the US economic outlook and as oil prices hovered near record highs.
The dollar index, which tracks the currency's performance against units of its six major trading partners, fell more than 0.8 percent to 72.397, its lowest since April 24. The US currency fell 0.4 percent to 103.95 yen. There was little reaction in currency markets to the Bank of Japan keeping its borrowing costs on hold at 0.50 percent as expected on Tuesday.
The US currency had been boosted on Monday after the private Conference Board's leading indicator index showed a rise of 0.1 percent in April to match the increase in March, which followed five straight months of declines. But while that data backed those arguing the US slowdown may be bottoming out, others said that further fallout from the global credit crunch would leave the economy entangled in a scenario of slowing growth versus higher inflation.