Euro bulls were disappointed after early gains for the single currency were pared as tumbling European markets reflected heightened risk aversion to political unrest across north Africa and the Middle East.
The single currency had moved higher on mounting speculation that the European Central Bank might raise interest rates sooner than expected due to rising inflationary pressures.
Lorenzo Bini Smaghi, ECB board member, warned that high food and oil prices might be more than just a transient event.
“There is pressure on prices of agricultural products and this may not be a temporary phenomenon – it may be a permanent one. The same for energy,” he told investors in Hong Kong on Monday.
The dollar made up ground in late trade but the euro remained 0.1 per cent higher at $1.3653. The single currency was flat at £0.8412 versus the pound and fractionally lower at Y113.58 against the yen.
Purchasing manager data from the eurozone showed that input prices were rising more quickly than output prices, putting the squeeze on company profit margins. Analysts said this indicated future price rises for consumers as companies would have no choice but to pass on higher costs.
The PMI surveys also showed that the pace of economic recovery was increasing and that eurozone sovereign debt concerns were having little impact on business sentiment. This was borne out by the German Ifo business confidence measure for February, which surged to a fresh record high thanks to strong export growth.
Stefan Schilbe of HSBC warned of the inflationary impact. “The excellent performance of the German economy is increasingly coming at a cost,” he said.
“Price pressure is likely to build up in Germany and is likely to push up the eurozone’s average inflation rate in the coming quarters.”
The yen was generally stronger after the Japanese government raised its assessment of economic growth as exports and industrial production increased in the first quarter of 2011.
The economy was emerging from a slump in activity during the final quarter of 2010.
The yen climbed 0.2 per cent to Y83.19 against the dollar and was up 0.1 per cent to Y135.01 versus the pound.
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