Euro bounces off four-month low

London

THE euro rose off four-month lows on Thursday, shrugging off data showing an unexpected slowdown in euro zone inflation, while elsewhere most currencies recovered some ground versus the dollar as the greenback's recent rally paused.

Eurozone inflation slowed to 1.2 per cent year-on-year in April, down from 1.3 per cent in March, and core inflation fell even more, raising questions about the European Central Bank's plan for withdrawing its monetary stimulus.

The dollar has erased all its 2018 losses in the past fortnight. It surged on expectations the United States would raise rates faster than had been forecast the rapid unwinding of positions by investors short the dollar.

But the dollar's rally came to a halt overnight after the Federal Reserve in its policy meeting did little to alter market expectations for further rate rises this year.

Comments from the Fed were "possibly disappointing for dollar bulls", but the main reason for the euro's resilience on Thursday was profit-taking after the dollar's rapid move higher, said Jane Foley, currencies strategist at Rabobank.

Foley said buyers of euros remained at risk of weaker euro zone economic data.

"We are no longer seeing better-than-expected data. The market is still a bit too long euros and remains vulnerable," she said.

The euro slipped slightly after the inflation numbers but recovered and rose 0.3 per cent to US$1.9986. It also firmed against sterling and the yen.

The Fed left its benchmark overnight lending rate in a target range of between 1.50 per cent and 1.75 per cent as expected on Wednesday. Analysts interpreted its comments on inflation as a signal that it may allow prices rises beyond its target, a stance that would limit the need for it to embark on a more aggressive path of tightening. The dollar index slipped 0.1 per cent.

"The market will have to get used to the fact that in order to prevent an economic overheating interest rates in the US will continue to rise," Commerzbank analysts said, predicting that rate differentials between countries would have a greater bearing on currencies and could cement euro/ dollar around US$1.20.

The dollar has been buoyed in recent weeks by the strong US economic outlook and rising Treasury yields. US jobs data on Friday should give further indications of the strength of the economy and inflationary pressures. REUTERS