The euro retreated from two-week highs against the dollar on Monday, pausing after its best weekly performance since February and drawing limited support from the weekend decision to double the International Monetary Fund's war chest. The Australian dollar slid after local producer price data cemented expectations of a rate cut by the Reserve Bank of Australia next week while sterling clung to its new-found market-darling status in the wake of upbeat UK retail sales data.
The single currency stood at $1.3189, down from Friday's peak of $1.3225 after a near 1 percent rally last week, its best since late February. Advanced and emerging countries agreed to double the firepower of the IMF to help contain Europe's debt crisis. But the United States did not contribute to the increase and market players said it was not enough by itself to wipe out investor worries over whether indebted euro zone countries could reduce debt yields to sustainable levels.
The euro also relinquished some of last week's gains as markets digested the implications of France's presidential race, which saw President Nicolas Sarkozy come second to challenger Francois Hollande. In addition, the Netherlands, another eurozone core member, was set to face new elections after crucial talks on budget cuts collapsed over the weekend.
Thus traders see little conviction for the euro to break out of its prevailing range of roughly $1.3000/$1.3300, with the late March/early April highs around $1.3375/85 providing formidable resistance. The pullback in the euro saw the dollar index rise to 79.252, up from a near three-week trough of 79.114 set on Friday. The dollar could gain further if Federal Reserve policymakers bring forward their projection on when the Fed should start raising interest rates at its two-day policy meeting starting on Tuesday.
Unexpectedly strong UK retail sales figures on Friday helped to add momentum to sterling, which fetched $1.6132, having hit a 5-1/2-month high of $1.6152 and just a stone's throw from its October 31 peak of $1.6167. The euro bought 81.85 pence, not far off a 20-month trough of 81.62 set last week. On the other hand, the Australian dollar dropped 0.4 percent after a benign producer price reading all but sealed expectations for a quarter-point rate cut at the Reserve Bank of Australia's (RBA) May 1 meeting.
The Aussie fell to $1.0340, holding above last week's strong support around $1.0300. The Japanese yen could weaken towards the Bank of Japan's policy meeting on Friday, where the bank is expected to adopt fresh easing steps. But the yen bounced back on Monday after support around 81.80 yen proved strong due in part to options-related buyback.