U.S. dollar drops, euro rises as markets look to ECB

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  • U.S. producer prices surge in March on year-on-year basis
  • Investors look to Thursday's ECB meeting
  • Canadian dollar rises after Bank of Canada raises rates

WASHINGTON, April 13 (Reuters) - The U.S. dollar eased back from a nearly two-year high on Wednesday as the euro reversed course and turned positive ahead of a policy-setting meeting at the European Central Bank on Thursday.

Against a basket of six major currencies , the dollar fell to 99.888, after climbing early in the day to 100.52, the highest since May 2020. It has gained nearly 3% so far this month and was on track for its biggest monthly rise in nine months.

The dollar index fell 0.449%, with the euro up 0.54% to $1.0884.

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"The dollar has just been on quite a tear for weeks now, and I think the run up to the ECB tomorrow (Thursday) is providing a convenient excuse for the market to book some profit in the dollar's gains," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

The Japanese yen also pared losses against the dollar, which had soared to a nearly 20-year high against the yen at one point on Wednesday as aggressive tightening from the Federal Reserve contrasted sharply with the Bank of Japan's ultra-loose monetary policy.

The yen weakened 0.19% versus the greenback at 125.61 per dollar.

Although the market is not anticipating any interest rate changes from the ECB at Thursday's meeting, market participants will be looking for a more hawkish tone from ECB President Christine Lagarde that could tee up a rate hike later in the year.

Money markets are pricing in about 70 basis points of interest rate tightening by December.

It is likely that markets are pricing in hawkish sentiment from the ECB at the upcoming meeting, but that tone will do little to keep pace with the aggressiveness of the Federal Reserve's approach to inflation, Manimbo said.

"Even a hawkish ECB isn't likely to change the narrative of the Fed raising rates at a far faster pace than Europe," Manimbo added.

Data showing U.S. producer prices in March surging 11.2% on a year-on-year basis, the largest increase since 12-month data were first calculated in November 2010, reinforced market expectations that the Fed will raise interest rates by half a percentage point at next month's policy meeting. read more

"The United States economy seems to be isolated enough and showing enough signs of inflation that the Fed is going to continue maintaining a very, very hawkish line and acting on it, and by doing so, of course, improving the dollar value," said Juan Perez, director of trading, at Monex USA in Washington.

Elsewhere, the Canadian dollar rallied after the Bank of Canada on Wednesday raised interest rates by half a percentage point - its biggest single move in more than two decades. The central bank also promised more rate hikes to battle soaring inflation. read more

The Canadian dollar rose 0.56% versus the greenback at C$1.26 per dollar.

Bitcoin last rose 4.65% to $41,368.19.

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Currency bid prices at 3:06PM (1906 GMT)

(This story corrects first paragraph to reflect that the U.S. dollar eased back from a nearly two-year high, instead of low)

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Reporting by Hannah Lang; Additional reporting by Saikat Chatterjee in London; Editing by Tomasz Janowski, David Holmes, Gertrude Chavez-Dreyfuss and Will Dunham

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