The euro rose against the dollar on Tuesday and traded above $1.60 for the first time since its 1999 inception amid growing expectations that the European Central Bank's next move may be an interest rate hike.
ECB Governing Council Member Christian Noyer said the bank would do what is needed to bring inflation back to its target of just below 2 percent, adding that the central bank would move rates if needed. That followed comments from Governing Council member Yves Mersch, who said the ECB has to ask itself each month whether a rate rise is needed to control inflation.
European bond prices declined after the policy-makers' comments, widening the yield advantage of German bunds over US Treasuries with similar maturities, further boosting demand for the euro. The comments, combined with a lackluster reading on US existing home sales in March, helped push the European currency through the key $1.60 level.
The euro traded as high as $1.6019, according to Reuters data, but later gave back some its gains. In late trading in New York, it was 0.5 percent higher at $1.5980. Rising inflation stemming from soaring food and energy prices came firmly into view as US crude oil hit a historic high of $119.90.
This gave added impetus to hawkish talk from ECB policy-makers, who are determined to contain the impact of rising prices, which may further propel the euro, analysts said. "Although $1.60 is an important level, it will not mark the end of euro strength and dollar weakness," she said. The dollar traded down 0.2 percent at 103.00 Japanese yen and 0.4 percent lower against a basket of six major currencies at 71.329 on Tuesday.
The euro's rally came after an earlier slide on news that Germany's BdB banking association had taken control of Duesseldorfer Hypothekenbank and planned to sell it after the property lender ran into problems linked to the current financial crisis.
Still, the ECB is seen keeping rates at least at a six-year high of 4.0 percent for a while. In contrast, markets expect the Federal Reserve to lower benchmark US rates further from the current 2.25 percent at a policy meeting on April 29-30.
US economic data on Tuesday showed the housing market remains soft, with existing home sales falling 2.0 percent last month to 4.93 million units. Elsewhere, the Canadian dollar fell after the Bank of Canada cut its benchmark interest rate by a half percentage point as expected. The US dollar last traded up 0.2 percent at C$1.0071.