The euro rose to its highest level in 14 months against the dollar on Wednesday as traders awaited the European Central Bank’s decision on interest rates.
The ECB was expected to tighten monetary policy for first time since the financial crisis after its meeting on Thursday, lifting its main lending rate by 25 basis points to 1.25 per cent.
Hans Redeker at BNP Paribas said he expected the euro to make further gains against the dollar after the meeting, even though a rate rise was fully priced into the market. He said this was because Jean-Claude Trichet, ECB president, was likely to signal further monetary tightening, highlighting the central bank’s diverging policy stance to the Federal Reserve.
“We expect that Mr Trichet will confirm the importance of vigilance on inflation, and against a backdrop of a Federal Reserve that is unlikely to move swiftly to remove dollar liquidity, our bias remains for a higher euro against the dollar after the meeting,” said Mr Redeker.
The euro rose as high as $1.4350 against the dollar, its highest since late January 2010 and was trading at $1.4336 in late New York trade. It rose 0.6 per cent to £0.8777 against the pound and 1.4 per cent to Y122.46 against the yen.
The yen retreated elsewhere as the prospect that Japan would stick to its ultra-loose monetary stance longer than other large central banks encouraged investors into carry trades.
Traders said demand for carry trades, in which the purchase of riskier, higher-yielding currencies is funded by selling low-yielding currencies, was being lifted by growing optimism over the global recovery.
The yen fell 0.6 per cent to a six-month low of Y85.38 against the dollar, slid 0.8 per cent to an 11-month low of Y139.45 on the pound, and lost 1.7 per cent to a 2½-year low of Y89.13 against the Australian dollar.
The Swiss franc rose after stronger than expected consumer price inflation, prompting speculation that the Swiss National Bank might retreat from its dovish monetary policy stance. The Swiss franc climbed 0.7 per cent to SFr0.9186 against the dollar.
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