NEW YORK, Nov 19: The dollar rallied on Friday, recovering from earlier losses on expectations the European Central Bank would soon raise interest rates, as investors decided the US interest rate outlook was still the better bet.

Though the US currency had been up for most of the global session it fell against the euro and pared gains against other major currencies after Jean-Claude Trichet, president of the European Central Bank said the ECB was ready to raise interest rates after keeping them steady for 2-1/2 years.

Later though, investors decided that an ECB rate hike was already priced in and even if the ECB raises rates it will not necessarily narrow the differential with US rates given the Fed is also expected to raise rates again.

I think what you are seeing is that the euro is getting no traction at all on the prospect of a rate hike in December from the ECB, said Daniel Katzive, foreign exchange strategist with UBS. There is a tremendous amount of capitulation in euro selling on euro/dollar rallies, he added.

The euro last traded at $1.1709, down 0.4 per cent. Earlier it climbed as high as $1.1794 after Trichet’s remarks, which investors took as extremely hawkish.

The Governing Council is ready to take a decision to move interest rates and moderately augment the present level of intervention rates in order to take into account the level of risks to price stability, Trichet said at a banking conference.

The dollar was trading at 119.24 yen, up 0.4 per cent from the prior New York session and nearing this week’s peak of 119.56 yen, the highest since August 2003.

The yen remained under pressure despite comments from Bank of Japan Governor Toshihiko Fukui, who restated the growing possibility that the central bank would ditch its ultra-easy monetary policy in the fiscal year from April 2006.

Sterling last traded at $1.7140, down 0.3 per cent. Earlier sterling had touched a two-year low against the dollar at $1.7100 on expectations the next interest rate move by the Bank of England would be a cut.

The dollar had been up strongly through most of the morning in New York as investors debated the outlook for US rates on the back of a series of increases from the Federal Reserve which has sent the benchmark rate to 4 per cent from 1 per cent.

The US currency also got a lift as a G7 source told Reuters the dollar’s strength was not a problem and said a meeting of G7 finance ministers and central bankers in London in December would discuss the sustainability of the dollar’s rally.

Traders said comments from the G7 source were helping but the dollar was getting more support from expectations that December will see heavy buying of dollars as US companies seek to take advantage of lower tax rates for the repatriation of profits under the Homeland Investment Act (HIA).

HIA repatriated earnings have been estimated at $300 to $400 billion for 2005, analysts say, with roughly about $40 billion expected to come in between now and December.

Traders had earlier warned that the dollar’s fall in reaction to Trichet’s announcement might be short-lived.

Interest rate differentials remain and are leading to dollar strength, said Craig Russell, senior foreign exchange dealer at Alaron FX in Chicago. Even if the European Central Bank raises a quarter percentage point, that differential (to US rates) remains.—Reuters