The euro fell from a 14-month high against the dollar on Thursday after the head of the European Central Bank dampened market expectations for aggressive interest rate hikes, though any pullback was expected to be limited. The euro also dropped against the yen, which rallied across the board after a new Japanese earthquake with a magnitude of 7.4 prompted investors to close trades in riskier investments funded by cheaply borrowed yen.
The ECB raised rates by 25 basis points, its first hike since the 2008 financial crisis, to battle rising inflationary pressures. ECB chief Jean-Claude Trichet signalled the bank was ready to tighten policy further if needed but added that the ECB had not decided if Thursday's move was the first in a series. "His tone is decidedly neutral right now. He's keeping things very close to his vest," said Boris Schlossberg, director of research at GFT in New York, referring to Trichet's comments. "The euro trade has been so focused on interest rate differentials, so some of the fast money might come out of the trade."
The euro was last down 0.3 percent at $1.4292, off a more than 14-month high of $1.4350 touched on Wednesday. Options traders noted demand for short-term upside strikes in the $1.4400 region, as market players looked to protect against a further rise in the euro.
The eurozone single currency has risen more than 3 percent since March 3, when Trichet strongly hinted at a rate hike in April, earlier than markets had then been expecting.
Investors also were cautious about the eurozone's debt crisis after Portugal asked for a bailout from the European Union, with the size of the package expected to be up to 80 billion euros ($114 billion). But fears of contagion to Spain eased somewhat after Madrid comfortably sold 4.1 billion euros of a new three-year bond. Against the yen, the dollar fell to a session low of 84.57 yen after news of the latest earthquake in Japan. It was last at 84.88 yen, down 0.7 percent. Stop-loss orders were triggered below 84.70.
The euro fell more than 1 percent against the yen, hitting the day's low around 120.74 yen, with traders citing real money selling of euros. It was last at 121.32 yen.
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