The euro rose against the dollar on Tuesday after comments by the head of the European Central Bank the previous day reinforced expectations for higher interest rates, while the yen held steady with the focus on Japan's nuclear crisis. ECB President Jean-Claude Trichet said on Monday inflation in the euro zone is "durably" above the ECB's target, cementing expectations that the central bank would raise interest rates next month.
The euro rose 0.1 percent on the day to $1.4101, moving away from the previous day's 1-1/2 week low around $1.4020. The European single currency is one of the best performing currencies against the dollar this year, having risen 5.4 percent since January. The euro's resistance levels are seen at $1.4220 and $1.4248. The dollar was slightly weaker at 81.67 yen, having fallen to 81.51 earlier as the discovery of plutonium in soil at the quake-hit Japanese nuclear plant soured risk sentiment.
The dollar index , which tracks the US currency's performance against a basket of major currencies, was slightly higher on the day at 76.150. The two-year US Treasury yield had risen to a three-week high at 0.785 percent at one stage, up more than 14 basis points in five days, widening its gap over comparable Japanese yields.
Preliminary estimates from Citi's month-end hedge rebalancing model suggested foreign buying of Japanese yen may dominate the March month-end fix. Citi said Japan's March 11 earthquake and subsequent nuclear crisis had hit local equities hard, leaving foreign investors over-hedged. This means that passive index-following investors may need to buy the yen at the month-end to reduce the value of their hedges. In other currencies, the signals pointed to net dollar buying against the euro and sterling.
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