LONDON, May 6: The dollar fell back sharply against the euro on Tuesday ahead of key interest rate calls by the European Central Bank and its British counterpart later in the week, dealers said.

They said figures showing a sharp rise in European producer prices reinforced expectations that the ECB would keep its interest rates on hold as it focussed on fighting inflation, with the Bank of England acting similarly.

At the same time, profit-taking on the dollar’s recent gains helped push the US unit down again, undercutting recent more positive sentiment on the US economic outlook.

In late European trade, the euro was at $1.5553, up sharply from $1.5492 in New York late on Monday.

The dollar slipped to 104.50 yen from 104.86 yen.

Dealers said trade was subdued early with Japanese financial markets closed for a public holiday and London participants returning to work after a national holiday in Britain on Monday.

Trade picked up as the US markets opened, with attention focussing on the ECB and Bank of England meetings due Thursday for their next lead.

Although some believe the dollar has turned the corner and the ECB will have to cut rates at some point as the eurozone economy slows, Jonathan Loynes at Capital Economics said such speculation might be premature.

“For a start, interest rate differentials look set to support the euro for a while longer yet. Admittedly, the pace of rate cuts in the US has eased and the Fed has hinted that it believes that its work is nearly done,” Loynes said.

“But if the news on the US economy continues to deteriorate as we expect, the Fed will have little choice but to respond further,” he said.—AFP