LONDON, Nov 2: The dollar faltered against the euro in late trade here on Wednesday as dealers pondered the possibility that the European Central Bank (ECB) might signal its intention to raise eurozone interest rates.
The single European currency was trading at $1.2066 against $1.2019 late Tuesday in New York.
The dollar was meanwhile at 116.79 yen after 116.71 on Tuesday.
A day after the US Federal Reserve took US interest rates to their highest level in four years, it is the turn of the ECB to act on Thursday.
While no hike is expected just yet, ECB chief Jean-Claude Trichet could make further reference to increased eurozone inflationary pressures — a factor that has been underpinning the euro of late.
Marios Marateftis at Standard Chartered said Wednesday’s trading had been range-bound, with players choosing to adjust positions and attempting to test new levels.
“There is some room for disappointment regarding the ECB press conference on Thursday. Trichet may not, in the end, be as hawkish as the market expects,” he said.
If this does happen, the euro can be expected to come under pressure.
But in the meantime, the fact that euro has been holding firm around $1.2040 suggests that markets are pricing in a quarter point ECB rate hike in December to stem inflationary pressures, said Ashraf Laidi at MG Financial.
This is especially true as the euro’s sturdy performance comes after the Fed’s unanimous rate hike and likelihood of further rate increases, he added.
“But we think that even if the ECB does not tighten on Thursday the euro would remain underpinned on fortified anti-inflation rhetoric in Thursday’s post-announcement press conference, paving the way for a December hike,” he added.
That aside, the market is also concerned about how much further US rates will rise. The benchmark Fed funds rate is now at 4.00 per cent — its highest in over four years.
“The market is now of the view that US interest rates will rise a further 75 basis points by the summer of next year,” said Neill Mellor at the Bank of New York.
Assuming that interest rate differentials remain the focus of currency markets the dollar appears most likely to benefit further, he added.
On the London Bullion Market, the price of an ounce of gold edged up to $460.80 from $459.50 late on Tuesday.
