FOREX-Euro slides to 2-mth low vs dollar; Trichet eyed
(Changes byline, adds quotes, updates prices)
By Simon Falush
LONDON, May 8 (Reuters) - The euro hit a two-month low against the dollar on Thursday, hurt by a report that U.S. and European officials want the dollar to strengthen, while the European Central Bank kept rates steady at 4 percent.
Investors awaited comments from ECB President Jean-Claude Trichet at a post-decision news conference for clues on whether softer regional economic data will prompt less hawkish language, which would fuel more speculation of a rate cut in the future.
The yen jumped, pushing the dollar and euro more than one percent lower at one point as sagging stock markets encouraged the unwinding of carry trades.
The dollar hit a two-month high against a basket of major currencies after a Financial Times report said the United States and Europe now have a united desire to see the dollar strengthen against the euro, citing officials on both sides of the Atlantic [ID:nT351863].
The single currency has been on the back foot in recent weeks after hitting a record high of $1.6018 on April 22 as poor economic data has started to eat away at a perception of a resilient euro area economy and increased prospects of rate cuts to come.
The ECB faces a policy dilemma in the current climate of high food and oil prices and slowing growth as the currency zone is proving vulnerable to fallout from the ongoing global credit crisis.
Trichet has previously sounded a hawkish tone on monetary policy, stressing inflationary risks and any retreat from this stance will be taken as a sign that rates may be heading lower later this year.
"The market will wait to see if the ECB will be less hawkish than it has been," said Adarsh Sinha, currency strategist at Barclays Capital.
"The euro could be boosted if Trichet is not as dovish as people expect given the recent data as they try to gauge whether there will be rate cuts in the coming months."
The euro fell as low as $1.5287 EUR=, its lowest since March 11 and down 4.5 percent from April's record high, before recovering to $1.5362 by 1146 GMT. The dollar was up 0.1 percent against a basket of six major currencies at 73.605, having earlier hit a two-month high at 73.895 .DXY.
The yen meanwhile has staged a slight recovery as global equities fell following nervousness about the lingering impact of the credit crunch.
"The yen appreciated as equities sold off leading to an unwind in the carry trade as it is inversely correlated to the performance of stocks," Sinha said.
In the carry trade investors sell low-yielding currencies like the yen to fund purchases of higher yielding assets.
The dollar was down 0.3 percent at 104.32 yen having fallen as low as 103.68 yen earlier in the session JPY=.
RATES STEADY
A sharp drop in euro zone retail sales and weaker than expected manufacturing data on Wednesday combined to raise worries about the region's economic outlook further and revived expectations for eventual rate cuts though the ECB held rates steady at 4 percent.
Economic data in Britain has reflected a sharply slowing economy, with house prices slipping rapidly.
While UK rates were held steady at 5 percent, but the pound erased brief gains GBP= after the decision as rates are seen as falling soon with 40 of 65 predicting a cut will come in June [BOE/INT].
"The BoE rate cutting cycle is not over with the next cut likely in June," said BBH in a note to clients. "The focus will be on the minutes (released on May 21) where at least one or two doves will likely have voted for a cut."
Elsewhere, the New Zealand dollar slid more than 1 percent versus the U.S. dollar NZD= after data showing the country's biggest quarterly employment drop in 20 years stoked expectations for its central bank to start cutting rates later in the year. [nWEL1952] (Editing by David Christian-Edwards)
