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Dollar Hits Highest vs. Euro in Month on Rate Outlook

The dollar rose to its highest against the euro in nearly a month Tuesday as expectations grew that the Federal Reserve will soon signal the end of its easing campaign, with weak European data denting interest rate sentiment in the region.

Exchanging Dollars and Euros
Exchanging Dollars and Euros

The U.S. currency was headed for its largest monthly gain in almost a year as the Fed begins its two-day meeting later Tuesday. Analysts expect its policy-setting body to cut benchmark borrowing costs by a quarter percentage point to 2 percent and indicate that the rate-cutting cycle is done for now.

"The expected shift in monetary stance by the Fed has been the basis of this rally in the dollar and its potential recovery," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, N.J.

By contrast, poor economic data in the euro zone has dented views of hawkish monetary policy in the region.

Data Tuesday showed French consumer confidence fell to its lowest level since 1987, when the data series began. This added to views that the euro zone economy, and by extension European Central Bank policy, is not insulated from the problems pushing the US economy to the verge of recession.

Data showing Spanish calendar-adjusted retail sales fell a record 5.5 percent in March and German inflation in April undershot forecasts, with the annual rate slowing sharply, also pressured the euro.

In midday New York trading, the euro was down 0.4 percent against the dollar at $1.5602, having earlier hit a four-week trough at $1.5542 . It fell 1 percent against the yen at 161.31 .

The euro also plumbed a four-week low against the pound at 78.31 pence , but later rallied to 79.03.

The euro trimmed it losses versus the greenback in the wake of a U.S. consumer confidence report showing April's index falling to its lowest since March 2003.

"There is nothing remotely good in the report," said Ian Shepherdson, chief U.S. economist, at High Frequency Economics in Valhalla, N.Y. "The numbers are dreadful and there's every chance of further declines over the next few months, though the tax rebates might offer some temporary relief."

The dollar was down 0.6 percent versus the yen at 103.40 yen , weighed down by weakness in the U.S. stock market.

Investors buy the yen when there is heightened risk aversion in the market.

Still, despite the dollar's losses, it was still on track for its best month in four years against the Japanese currency.

The dollar index was also on pace for its best month since November 2005 , benefiting from the view that US interest rates are nearing a bottom. It last traded at 72.697.

However, this week's data on growth, consumption, manufacturing and payrolls is likely to show the economy is still deteriorating, implying there is still some risk that interest rates may fall further.

Gross domestic product data Wednesday could show the economy shrank in the first quarter and Friday's jobs report is expected to show payrolls fell 80,000 in April, according to a Reuters poll.

"I think incoming US data will be the deciding factor for the dollar," said Forex.com's Dolan. "The reality is that we still have a bleak US outlook. Rising energy prices, falling home values, rising unemployment and tight credit conditions are killing the US consumer."

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