The dollar suffered as global central banks’ reactions in the face of mounting inflationary pressures dominated the foreign exchange landscape this week.

The Federal Reserve at its policy meeting on Wednesday left its main Fed funds lending rate at 2 per cent, as expected.

Although it sounded a more hawkish tone than in its previous post-meeting statements, traders said it did little more than reflect views that had been aired by Fed officials.

In particular, they said, there was little sign that the Fed would act to reinforce comments from Ben Bernanke, its chairman, who this month spoke of the central bank’s desire to see the dollar strengthen to fight inflationary pressure caused by soaring commodity prices.

This contrasted with comments from Jean-Claude Trichet, president of the European Central Bank, who cemented expectations that the central bank would raise interest rate by 25 basis points to 4.25 per cent after its meeting.

Mr Trichet told the European Parliament that the central bank was on a “heightened state of alertness” over inflation.

“We expect the ECB to raise rates at its meeting in early July,” said David Woo, of Barclays Capital. “If the market is coming to the view by then that the Fed’s strong language against inflation may not be backed by actions, we think that euro/dollar is likely to move up to $1.60.”

Over the week the euro rose 0.9 per cent to $1.5745 against the dollar and advanced 0.2 per cent to £0.7917 against the pound.

The dollar also lost ground elsewhere, hurt as oil prices raced to new highs and gold prices soared.

Maurice Pomery, of IDEAGlobal, said the rise in oil and gold prices looked to be prompted by investors hedging against the prospect of a weaker dollar. This, he said, was likely to test the resolve of Mr Bernanke in his desire for a stronger dollar. “The dollar looks like it is teetering on the brink of a major slide again,” he said.

The dollar fell 0.6 per cent to $1.9880 against the pound on the week, lost 1.3 per cent to SFr1.0215 against the Swiss franc and dropped 0.7 per cent to Y106.40 against the yen.

The yen dropped to a record low of Y169.45 against the euro on Thursday and hit a 17-year trough against the Swiss franc amid reports that Japanese investors were stepping up their purchase of foreign assets in an attempt to chase yield. The yen rallied sharply as global equities tumbled later in Thursday’s session.

Currencies had been displaying increasing immunity to developments in equity markets. Analysts said, however, that the sheer viciousness of the fall in stocks had led markets to question how aggressively central banks, especially the Fed, could tighten monetary policy.

Kamal Sharma, of JPMorgan, said rate differentials were narrowing between those countries expected to raise rates and those countries where central banks were the least hawkish, predominantly low-yielding funding currencies. “The yen remains a slave to rate differentials and, if equity markets continue to fall at a pace that compromises the Fed’s ability to hike, this will result in narrower rate spreads and a stronger yen.”

Over the week, the yen eased 0.1 per cent to Y167.50 against the euro, rose 0.2 per cent to Y211.40 against the pound and climbed 0.1 per cent to Y102.10 against the Australian dollar.

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