Dollar at 3-Week Highs vs. Euro on Rates Outlook

The dollar traded at three-week highs against the euro Friday, boosted by a growing view the Federal Reserve may stop cutting interest rates soon.

U.S. economic data this week showing resilience in some sectors, such as the labor market, contrasted with a sharp drop in business sentiment in Germany.

That news, combined with European Central Bank policy-makers' comments highlighting worries about excess volatility in foreign exchange trading, dampened expectations for a rate hike in the euro zone and hurt the euro.

"It's a major shift in sentiment regarding the outlook of interest rates and we may see the dollar strengthening until the next Fed meeting," said Mark Meadows, a market analyst at Tempus Consulting in Washington.

The perceived odds of the Fed keeping its benchmark interest rate unchanged at 2.25 percent at its meeting next week rose to about 26 percent, futures trading shows.

Just over a week ago, futures were evenly split between a 25- and a 50-basis-point cut.

Meanwhile, traders are paring bets the next move by the ECB will be a hike in benchmark interest rates.

"Europe is really not insulated and its economy is beginning to show signs of a slowdown," said Meadows. "While most people now believe the Fed is about to end its easing cycle, a growing number of investors believe the ECB may have to start cutting rates really soon."

In midday trading in New York, the euro was 0.3 percent lower at $1.5628, after dropping as low as $1.5555 earlier, a three-week low.

The dollar index , which tracks its performance against a basket of major currencies, earlier hit a one-month high of 73.030.

It last traded at 72.665, putting it on track for its best monthly performance since May 2007.

Still, the U.S. currency pared some of its earlier gains and fell against the yen and the Swiss franc in mid-morning trading after news a cargo ship contracted by the U.S. military fired at least on shot toward an Iranian boat.

The dollar last traded 0.1 percent lower at 1.0343 Swiss francs and it was 0.1 percent down against the Japanese yen at 104.16.

This week's rally in the dollar may have also led some investors to sell the currency ahead of the weekend to cash in profits, traders said.

"After the run in the dollar this week, investors would rather take the opportunity and sell some of it to book in some profits ahead of the weekend," said Joe Manimbo, a currency trader at Ruesch International in Washington.

The dollar had limited reaction to a report showing US consumer confidence fell for a third straight month, touching its weakest in more than a quarter century.

In Europe, the Ifo German business sentiment index this week showed the biggest monthly fall since September 2001 on Thursday, taking the April headline number to a two-year low.

Together with a soft euro zone manufacturing survey, the data knocked the euro off record highs above $1.60 set at the start of the week.

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