The euro rose against the dollar on Thursday as investors piled into the single European currency in the belief that the interest rate differential with its US counterpart will continue to widen. The dollar relinquished gains made earlier in the day as investors reckoned comments from US Treasury Secretary Timothy Geithner ahead of a G20 finance ministers meeting may not have warranted a brief jump in the US currency.
The dollar stayed under broad selling pressure, hovering near a 15-year low against the yen as it continued to take a beating on speculation the Federal Reserve may implement more dollar-negative quantitative easing next month. Expectations of more Fed easing have driven three-month interbank dollar rates lower. At the same time, eurozone rates have risen to their highest since July last year, widening the spread between the two.
Some analysts said this widening spread, which indicates US and eurozone rates are expected to diverge further, was helping push the euro higher. "The majority of the market sees a positive interest rate differential in the euro given the difference in euro and dollar money market rates," said Stephen Gallo, head of markets analysis at Schneider Foreign Exchange.
The euro was at $1.4030 having climbed to a session high of $1.4050 according to Reuters data. Technical traders highlighted the euro's rally stalled at the 76.4 percent retracement of its decline from this month's high of $1.4157 to yesterday's low at $1.3696.
Finance ministers and central bank chiefs from the Group of 20 meet on Friday in South Korea to discuss a common path on managing currency, trade and economic imbalances. G20 leaders will meet in Seoul next month. But traders said an agreement on currencies was unlikely this week given the ongoing race for some countries to weaken their currencies, and that the market was positioned for more dollar selling heading into the meeting.
Chris Turner, chief currency strategist at ING said that should the G-20 acknowledge that emerging Asia will have to reform their exchange rate systems and embrace flexibility, it would make a good start to address the global currency war.
The dollar index slipped 0.3 percent to 76.937, staying near a 10-month low of 76.144 hit last week. The dollar fell as low as 80.93 yen on Reuters data, pulling back from the day's high of 81.82 yen and closing in on 80.84 yen hit on Wednesday, its weakest since mid-1995. The market is wary that Japanese authorities could intervene to slow the yen's rise again, after they did so on September 15, selling yen for the first time in more than six years.
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