Euro falls as Trichet signals no rate rise

(FT) -- The euro retreated from a 17-month peak against the dollar and a 13-month high against the pound as Jean-Claude Trichet, president of the European Central Bank, signaled that eurozone interest rates would remain on hold next month.

Analysts said the single currency had received support in recent weeks since the ECB, in contrast to the Federal Reserve and the Bank of England, was seen as being ready to tighten monetary policy further in the coming months in a bid to stem inflationary pressures in the eurozone.

While the ECB, as expected, left rates unchanged at its policy meeting on Thursday, following April's 25-point rise, investors focused on comments from Mr Trichet for clues as to future monetary tightening.

Ahead of his remarks, forecasts were split as to whether the ECB chief would signal a move in June or July.

In the past, Mr Trichet has used codewords to signal the ECB's intentions. The phrase "strong vigilance" over price pressures has implied a rate increase at the ECB's next meeting, while the phrase "monitoring closely" has signaled the no change in policy the following month.

In the event, Mr Trichet said the ECB was "monitoring price developments very closely", which sent the euro lower as markets moved to price out the chance of a June rate rise.

"Trichet's comments seem less hawkish than the market had anticipated and the euro is coming off sharply," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

"He is using none of the word cues that point to a June hike."

The euro, which on Wednesday hit a 17-month peak of $1.4939 against the dollar, fell 0.8 per cent to $1.4718.

The euro also retreated from a 13-month peak of £0.9042 against the pound, falling 0.6 per cent to £0.8936 and dropping 1.7 per cent to Y117.42 against the yen.

Meanwhile, the pound eased 0.2 per cent to $1.6460 against the dollar as the Bank of England, as universally expected, kept UK interest rates on hold at a record low of 0.5 per cent after its monetary policy committee meeting.

The pound suffered after a survey suggested activity in the UK services sector slowed markedly in April dented expectations that the Bank would move to abandon its ultra-loose monetary policy stance in the near future.

The UK services sector purchasing managers' index dropped 54.3 in April, below expectations for a reading of 56.0.

Kathleen Brooks at Forex.com said the figures were a worrying sign of a slowdown in the UK economy just as public sector spending cuts started to take hold.

"This data is pivotal for the Bank of England. This reduces the chances of a rate hike, even if headline inflation remains elevated," she said. "This will keep pressure on the pound."

Meanwhile, weakness in equities and commodity prices weighed on investors' risk appetite, buoying haven demand for the yen and the Swiss franc.

The dollar fell 1 per cent to Y79.80 against the yen, its weakest level since global central banks intervened to cap yen strength in March, and eased 0.3 per cent to SFr0.8587 against the Swiss franc.

The dollar did advance against commodity-linked currencies, however, as raw material prices came under pressure.

The greenback climbed 0.5 per cent to $1.0671 against the Australian dollar, rose 0.7 per cent to C$0.9658 against the Canadian dollar and gained 0.3 per cent to $0.7865 against the New Zealand dollar.

© The Financial Times Limited 2011

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