The euro came close to a record high against the dollar Monday as higher-than-forecast euro-zone price data reinforced expectations that the inflation-focused European Central Bank will not start cutting rates soon.
Annual euro-zone inflation jumped to 3.5 percent in March, a record since the inception of the euro according to Reuters data and out-stripping the 3.3 percent consensus.
The outlook for euro-zone rates contrasts with the United States where the Federal Reserve is widely expected to continue to cut the benchmark rate in a bid to stoke economic growth. Higher rates tend to lure investors and increase demand for a currency.
"Of particular note for the euro was the quickening in the March CPI," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York in a research note. "A positive for the euro given the European Central Bank's focus on headline inflation."
The euro rose as high $1.5895 -- just short of record highs set two weeks ago -- before retreating through the New York session. It was a volatile session in both London and New York, with the single euro zone currency swinging between gains, losses and trading little changed.
The Federal Reserve has slashed rates by 300 basis points since September in a bid to restart flagging growth and is expected to cut again as soon as next month .
"While the euro-zone data points to some deceleration of growth, elevated prices remain the ECB's main concern," said Marc Chandler, currency analyst at Brown Brothers Harriman in a research note to clients.
The contrasting interest rate and growth paths have pushed the euro 8.3 percent higher versus the dollar since the start of the year. The euro is on track for its biggest quarterly percentage gains since the fourth quarter of 2004.
Down 6.5 percent, the dollar index is also targeting its worst performance since the fourth quarter of 2004.
The euro scaled all-time peaks, with sterling depressed by soft housing and service sector data.
Speaking just before the euro-zone data was released, ECB Governing Council member Erkki Liikanen said there are rising price pressures in the euro zone, echoing the tone of recent comments from fellow policy-makers.
Money markets are now pricing in an around 90 percent chance of a 25 basis point ECB rate cut from the current 4 percent by year-end -- compared with expectations of nearly 75 basis points of easing a month ago
Risk Aversion Persists
Higher-yielding currencies such as the Australian and New Zealand dollars tracked equity markets, indicating that nervousness about the health of the global economy remains at the forefront of investors' minds.
Adding to a risk-averse mood were end-quarter tensions in the short-term money markets, which have persisted despite liquidity-pumping measures from major central banks.
Investors shied away further from relatively risky carry trades in which low-yielding currencies such as the yen are used to fund investment in high-yielders such as the Aussie.
The dollar has also taken on low-yielding status as the Fed's easing has taken the policy rate to 2.25 percent – the second-lowest among major economies after Japan.
The yen, however, failed to benefit from the increased risk aversion, as fiscal year-end activity from Japanese investors and corporates kept the currency under pressure, traders said.
The dollar rose versus the yen, while the euro climbed against the Japanese currency .
Dollar/yen, down 10.3 percent this year, is having its worst quarterly performance since the third quarter of 1999.
Reports showing business activity in the U.S. Midwest contracted in March for the second consecutive month and activity in New York city weakened in March, failed to impact currency markets.