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Expect the euro's slide to continue as the U.S. economy roars ahead as Europe's economy remains sluggish.
http://news.yahoo.com/news?tmpl=sto...arkets_forex_dc
Dollar hits 9-month high on rate outlook
By John Parry 12 minutes ago
NEW YORK (Reuters) - The dollar jumped to a nine-month high against the euro on Monday, helped by interest rate differentials in the United States' favor and concern about the future of political integration in the euro zone.
Last week's improved U.S. trade data and recent comments by
Federal Reserve Chairman
Alan Greenspan reinforced the view in the market that more U.S. interest rate hikes lay ahead.
The euro fell to $1.2029 , its lowest since early September 2004, and the dollar rose to eight-month highs against the yen around 109.67 yen.
The euro's decline reflected speculation that the European Central Bank might be comfortable with a weaker euro and also a sharpening market focus on the $1.20 mark, analysts said.
That level is increasingly seen by traders as a critical support area for the euro zone currency.
Since the French and Dutch rejected a proposed
European Union constitution two weeks ago, "the capitulation of long euro positions has continued to dominate. I don't see that backdrop has changed," said Todd Elmer, foreign exchange strategist with Barclays Capital in New York.
"Long" positions are essentially bets that a currency will strengthen.
But by early afternoon in New York, the dollar had pared some gains in a flurry of profit-taking. The euro recovered to close to $1.21 but was still down around 0.2 percent from late Friday. Some traders said the euro was broadly lifted by buying of euros against yen as currency investors repositioned.
"Europe is going home now and the euro found a bit of a bid at $1.2030 as some Europeans are taking back some short positions ... while we are seeing a lot of euro/yen buying," said John McCarthy, director of foreign exchange trading with ING Capital Markets LLC in New York.
"Short" positions are essentially bets that a currency will weaken.
Soft Japanese economic data on Monday also helped the dollar gain against the yen, supporting broad dollar strength, analysts said.
"Dollar/yen led the thrust of this dollar up-move and in part the market is responding to some bullish dollar technical signals," said Elmer, of Barclays Capital.
New data showed the Japanese economy grew less briskly in the first quarter than originally estimated, expanding by 1.2 percent compared to the original estimates of 1.3 percent.
Following last week's narrower-than-expected U.S. trade data and Greenspan's comments that the economy was on a "firm footing," the market is looking to see if this week's figures will reinforce expectations of at least two more U.S. rate hikes, analysts said. The trade data set some economists looking for stronger second-quarter growth than previously thought, boosting the chances of more interest rate hikes this year.
There had been a flurry of speculation the week before of the possibility of only one more rate hike this year.
On the U.S. data slate for this week are reports on producer prices, consumer prices, industrial production, net capital inflows and the U.S. current account deficit.
Finance ministers from the G8 grouping of the world's rich nations during a weekend meeting in London kept up pressure on China to move toward more flexible exchange rates, but produced no clues as to the timing.
Sticking to tradition, the G8 did not mention currency issues in its communiqu as central bankers from the group did not attend the meetings.
Higher interest rates and the relatively lucrative yields on U.S. deposits have helped the dollar rise more than 10 percent against the euro so far this year.
More rate hikes are expected, starting with the Fed's next policy meeting on June 29-30. Another quarter-percentage-point rate increase then would be the Fed's ninth straight and it would take the benchmark federal funds rate to 3.25 percent.
In contrast, the euro zone's sluggish economy is raising expectations that the European Central Bank's next monetary policy move may be a rate cut.
(Additional reporting by Justyna Pawlak in London)
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