FOREX-Euro backs off historic peak after Juncker FX comments

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By Veronica Brown

LONDON, April 17 (Reuters) - The euro retreated sharply from a record high near $1.60 versus the dollar on Thursday, with profit-taking sped up by comments from Eurogroup Chairman Jean Claude-Juncker speaking out against the single currency's rise.

Juncker said markets did not correctly understand the Group of Seven industrialised nations' message on forex, repeating that the G7 stressed it did not like excessive volatility as that was bad for global growth.

He also said he did not consider the euro's rise against the dollar to be desirable.

"It's created confusion in the market. Before the comments, the euro was at all-time highs and the market is tense, so investors are quick to take profits on long positions," said Niels Christensen, currency strategist at Nordea.

The euro's wings were also bent by quarterly results from Merrill Lynch MER.N and Bank of New York Mellon (BK.N).

The banking results provided some relief to some investors worrying about the impact of the global credit crunch on corporate profitability.

The euro had broken up to $1.5983, a record high according to Reuters data, before profit-taking kicked in. The Juncker comments caused it to slide sharply, leaving it down 0.5 percent at $1.5870 EUR=.

But with the European Central Bank set on combating inflation and the U.S. Federal Reserve seen cutting interest rates further to limit damage from the ongoing credit market crisis, analysts said the euro's broad uptrend remained intact.

ECB Governing Council member Axel Weber demonstrated his hawkish credentials in the wake of Wednesday's record high inflation data for March, saying that the central bank has to fight the risk of broad-based second round effects proactively and decisively [nWEB1985].

"There's a clear divergence between what matters for the dollar and what matters for the euro. This continued divergence in policy, the bias towards further Fed easing and the hawkish commentary coming out the the ECB does suggest ultimately we'll make a break above the $1.60 level," said Kamal Sharma, G10 strategist at JP Morgan.

PORT IN A CREDIT STORM

The crisis in credit markets was reflected in a sharp widening of the spread on two-year U.S. interest rate swaps to their widest level in about five weeks.

The interbank cost of borrowing three-month dollars rose its largest amount since August 2007 -- when the global crisis in credit markets started [nL17867355].

Broad dollar sentiment was undermined on Wednesday after data showing U.S. housing starts dropped by 11.9 percent last month and that March consumer prices rose a less-than-expected 0.3 percent.

That bolstered expectations for the Fed to cut rates by at least 25 basis points from 2.25 percent in late April, denting the U.S. currency's yield appeal.

U.S. borrowing costs have been slashed 3 percentage points since September to 2.25 percent, while the ECB is expected to stand pat at 4 percent for some time.

"The euro is probably one of the only safe ports in the current credit-tightening storm, and that's been giving euro a little bit of a boost," said Paul Robson, currency strategist at RBS Global Banking.

Meanwhile sterling got a shot in the arm after a Treasury source said British authorities could announce as early as next week the details of a plan to ease tight conditions in the mortgage market.

Speculation has been growing that the BoE could allow banks to temporarily swap mortgage-backed securities for government bonds to help ease a lending squeeze. Finance minister Alistair Darling is due to meet mortgage lenders next week.

Sterling was up 0.3 percent at $1.9804, while the euro fell 0.6 percent to 80.37 -- having hit a record high at 80.98 on Wednesday.

The yen was pressured as gains in stock markets had prompted some investors to take on carry trades. The dollar was up 0.6 percent to 102.32 JPY= while the euro gained 0.5 percent to 163.17.

(Reporting by Veronica Brown; Editing by Stephen Nisbet) x