NEW YORK, Jan 14: The dollar slipped against the euro on Friday after European Central Bank President Jean-Claude Trichet said the bank must be vigilant in watching inflation expectations, using a buzz word that traders interpreted as hawkish.

On Thursday, Trichet’s omission of the word “vigilant” was viewed as less hawkish than expected and pressured the euro lower. On Friday, the euro rebounded against the dollar.

The anchoring of inflationary expectations has remained encouraging. But we have to be vigilant, Trichet told Bloomberg Television after addressing business students at a conference.

The euro moved briskly above $1.2100 after Trichet’s remarks, which traders took to signal the ECB is more prepared to raise interest rates than previously thought.

Trichet did move the market. The dollar was regaining its footing when Trichet’s comments came out but then sold off, said Brian Dolan, director of FX research at Gain Capital in Warren, New Jersey.

Late in New York, the euro was trading around $1.2135 up about 0.8 per cent from late Thursday. Against the yen, the dollar was trading little changed at 114.21 yen.

For the fourth day this week, the euro has found support around $1.2030/40, an area where central banks have been placing buy euro orders, according to traders. It bounced from its 100-day moving average around $1.2000 on Thursday.

So far this year, the euro has remained in range against the dollar of roughly between $1.1800 to $1.2180.

On Thursday, Trichet had omitted using the word “vigilant” in a press conference after the ECB’s decision to hold its key interest rate unchanged at 2.25 per cent.

Higher euro zone rates would make the euro more attractive to global investors.

The dollar also was under pressure after US Treasury Secretary John Snow ignited some concerns about central bank diversification out of dollar-denominated assets.

Earlier, the dollar slipped as traders questioned how much further the Federal Reserve will raise interest rates after US retail sales came in weaker than expected and core producer prices were lower than forecast.

Downward pressure on the dollar is increasing as analysts reckon the Fed is approaching the top of its monetary tightening cycle. Rate hikes boosted the currency in 2005.

The dollar dropped 0.7 per cent to 1.2764 Swiss francs. Against the greenback, the pound jumped 0.9 per cent to $1.7756.

Higher US interest rates and yields burnish the appeal of dollar-denominated deposits to global investors.—Reuters