Euro falls as dollar gains after recent sell-off

London

THE euro fell to a six-week low on Wednesday after an upbeat assessment of the US economy by Fed chairman Jerome Powell boosted the dollar, while slowing eurozone inflation underlined the European Central Bank's caution in removing stimulus in the region.

After a strong start to the year in which investors speculated the ECB would withdraw stimulus as the region's economy recovered well, the euro has stumbled.

A more hawkish signal from the US central bank and investors betting that the dollar had been oversold have hurt the euro in recent weeks.

Political developments are also making euro investors cautious. Italians are preparing to vote in a national election on Sunday, while the leading political parties in Germany decide on a coalition deal that would secure Angela Merkel a fourth term as chancellor.

The euro fell 0.2 per cent to US$1.2215, its lowest since Jan 18, while the dollar against a basket of currencies rose 0.2 per cent to 90.5, a three-week high.

"The market perceived Powell to be hawkish and a softer CPI number out of Europe. It all feeds into a correction for the euro-dollar," said Kit Juckes, chief FX strategist at Societe Generale in London.

Mr Juckes said the euro could fall to as low as US$1.20 but longer-term, unless the outlook for the eurozone economy changed substantially, he still saw the euro rising towards US$1.30.

Eurozone inflation slowed to a 14-month low in February, underlining the ECB's caution in removing stimulus despite growth exceeding expectations.

Mr Powell's testimony to US lawmakers on Tuesday encouraged some investors to believe the Fed would raise rates four times this year rather than three.

The dollar has pulled itself from three-year lows hit on Feb 16 on the back of rising US Treasury yields and investors viewing the currency as oversold. But the jury is still out on whether the dollar is enjoying only a temporary bounce amid a prolonged period of weakness.

"The long-term risks of an expansionary monetary policy in times of a robust economy, which Powell mentioned briefly and that put pressure on the dollar only a few days ago, were now pushed aside by the market," Commerzbank said. REUTERS