The euro rallied broadly on Thursday as encouraging news about the European economy and banking system sparked hope that the 16-country euro zone may be emerging from the depths of recession. The dollar, meanwhile, fell against most currencies as a net quarterly profit at Credit Suisse and a six-month high in a key euro-zone manufacturing index encouraged investors to take on risk, eroding safe-haven flows into the greenback.
The euro and British pound as well as the high-yield Australian and New Zealand dollars all rose smartly against the US currency while Wall Street staged a late afternoon rally. "The results and the manufacturing data boosted sentiment and provided a bit of relief by suggesting the European banks are still making money," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York. Still, he said confusion about the European Central Bank's next interest rate move and persistent worries about the world economy make the euro's rise above $1.31 "more of a selling opportunity than a sustained rally."
The euro was up 1.1 percent at $1.3140, well off a global session low of $1.2981. It also added 1 percent to 128.68 yen. Andrew Busch, currency strategist at BMO Capital Markets in Chicago, said euro gains were likely to be capped around $1.32, leaving the currency in a $1.27-$1.32 range in coming weeks. Sterling rose 1.7 percent to $1.4720, reversing the prior session's sharp slide that came after Britain forecast a surge in government borrowing and a rapid deterioration in public finances.
The dollar last changed hands at 97.92 yen, little changed from late Wednesday. Analysts said the dollar was weakened slightly by data showing a 3 percent slide last month in the pace of existing US home sales. "It looks like the housing market has not yet bottomed, and this is not good for the dollar," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey.
The dollar also fell 1.4 percent against the Canadian dollar to C$1.2238 after the Bank of Canada laid out a framework for unconventional monetary policy that included provisions for buying financial assets. The BoC, which cut interest rates to 0.25 percent earlier this week, said it was not ready to take such steps, though.
The ECB is also expected to cut interest rates in May but investors are uncertain about whether it will follow the Federal Reserve and other central banks and start buying assets to increase the money supply and stimulate growth. Recent remarks from ECB officials have shown a lack of consensus on the next move, said Samarjit Shankar, director of global FX strategy at Bank of New York-Mellon.