The euro bounced off a six-week low against the dollar this afternoon, as an ECB policymaker said April's interest rate rise was "certainly not" a one-off. European Central Bank policymaker Luc Coene was quoted today saying inflation risks in the eurozone have increased and price pressures are building. [1] The euro was last up 0.3% against the dollar at $1.4240, near the session peak of $1.4259, and well off the session low of $1.4121. The ECB raised interest rates by 25 basis points to 1.25% in April to address the firming price pressures, ending two years of crisis-induced loose policy. Financial markets expect two more such rises this year. The euro's gains reversed the earlier trend where the dollar index scaled a three-week high as a sell-off in commodities prompted an unwinding of dollar-funded bets on risky assets, the same reversal that pushed the euro to its multi-week low against the greenback. Certainly, for now, it appears the market is fixated on interest rate expectations and talk of a potential interest rate hike could give the euro a boost. Meanwhile, the US economy struggled to gain momentum early in the second quarter, with retail sales posting their smallest rise in nine months in April and wholesale prices increasing more than expected. Other data released today showed new claims for unemployment benefits fell 44,000 last week to 434,000, but they remained too high to signal a strong labor market recovery. The market is receiving positive and negative data and nothing to show the US economy is recovering or stalling. It’s the inconsistency in the economic data that brought the euro/dollar off its lows today. Paolo Palazzi-Xirinachs, Chicago

 

Notes: Source: [1] Reuters (12 May 2011), [2] Bloomberg News (12 May 2011), [3] Sydney Morning Herald (12 May 2011), [4] Japan Today (12 May 2011). Chart data supplied by Bloomberg.