Euro rallies with ECB meeting ahead; dollar weakens

NEW YORK Wed Mar 2, 2011 4:13pm EST

NEW YORK (Reuters) - The euro rose to a near four-month high against the dollar on Wednesday and looked set to extend gains on growing expectations interest rates in the euro zone will rise earlier than those in the United States.

The Swiss franc soared to a record high against the dollar as escalating tensions in Libya and fears of contagion to other oil-rich countries, especially Saudi Arabia, prompted investors to seek safety in the Swiss currency.

The European Central Bank holds its policy meeting on Thursday. With oil prices trading above $100 a barrel and euro zone inflation well above target, investors expect the ECB to sharpen its anti-inflation rhetoric.

After struggling in recent sessions to break above resistance at $1.3862, its previous 2011 high, the euro pierced that level as North American trading got underway.

The euro could make a run toward $1.40 should post-meeting comments from ECB President Jean-Claude Trichet reinforce expectations of an interest rate hike, analysts said.

"The perception is growing in the market that the ECB will certainly be hiking rates sooner than the Fed and that has really underpinned the euro for the time being," said Greg Salvaggio, senior vice president of capital markets at Tempus Consulting in Washington.

The euro climbed as high as $1.3890 on trading platform EBS, its strongest level since November 9. It last traded at $1.3869, up 0.7 percent on the day.

Euro zone producer prices rose in January at the fastest rate in the history of the single currency, data showed on Wednesday, highlighting the risk that the ECB may raise rates sooner than expected.

Traders reported option-related offers ahead of $1.39. Further upside targets include $1.3947, around the 76.4 percent retracement of the euro's fall from November to January, and $1.3958, the 200-week moving average.

The dollar index .DXY, which tracks the greenback against a basket of major currencies, fell to as low as 76.529, its lowest since early November 2010.

EURO AS SAFE-HAVEN

The U.S. currency has been unable to benefit from the recent spike in risk aversion amid political tensions in the Middle East and North Africa, prompting some investors to question whether the dollar has lost its safe-haven status.

"People are starting to view the euro as a counter to the dollar in times of turmoil simply because they both offer equal security. However, the euro is offering higher yields," Salvaggio said.

The dollar has come under pressure as investors focused on the view that higher oil prices would push other central banks to raise interest rates to combat inflation even as the Federal Reserve maintains its stimulative monetary policy.

Investors also fret that rising energy costs could hurt U.S. consumer spending, which accounts for about two-thirds of the U.S. economy.

However, some analysts said if tensions escalate, concerns about the impact of soaring oil prices on the global economy could sour investor appetite for risk and help the dollar regain its safe-haven status.

"If there is no resolution to the crisis in the Middle East, oil prices will stay elevated and people will stop focusing on the inflationary impact. The euro is in favor now but in two to three weeks it could be the dollar," said Simon Derrick, currency strategist at Bank of New York Mellon.

The dollar was little changed at 81.89 yen, after falling as low as 81.57 yen on EBS, a near one-month low. The greenback hit an all-time low of 0.9202 Swiss franc on EBS and was last down 0.5 percent at 0.9237.

Some traders said the dollar could get a respite if U.S. non-farm payrolls jobs data for February, due on Friday, comes in stronger than expected, bolstering the case for the Federal Reserve to wind down its $600 billion bond-buying program.

U.S. private-sector employers added more jobs than expected last month, data showed on Wednesday.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article