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Dollar Falls Vs. Euro on Comments from ECB

The U.S. dollar pulled back from a two-month high against the euro after the European Central Bank left interest rates unchanged and its president's comments focused more on inflation than some had expected.

Exchanging Dollars and Euros
Exchanging Dollars and Euros

ECB President Jean-Claude Trichet said the central bank must ensure inflation remains temporary even as risks to euro zone growth prevail. Trichet was speaking at a news conference after the European Central Bank kept benchmark interest rates steady at 4 percent.

The ECB's decision followed an earlier one from the Bank of England which held rates steady at 5 percent.

Trichet seems to be signaling steady rates, said a Gain Capital trader. "He does not deliver too much of the dovishness some were expecting, sounding very neutral in his statement so far."

This was euro-positive, the trader said, as investors who had sold the euro short on expectations it had more room to fall would need to buy back those positions to prevent losses.

The euro was up against the dollar. Earlier it had fallen to its lowest since March 11 and down 4.5 percent from April's record high.

The dollar was up against a basket of six major currencies, having earlier hit a two-month high at 73.895.

The single currency has been sliding in recent weeks after hitting a record high of $1.6018 on April 22 as poor economic data has started to eat away at perceptions of a resilient euro area economy and increased prospects of rate cuts to come.

The ECB faces a policy dilemma in the current climate of high food and oil prices and slowing growth as the currency zone is proving vulnerable to fallout from the global credit crisis.

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In a volatile session, the euro was down prior to Trichet speaking on a Financial Times report that unidentified U.S. and European officials want the dollar to strengthen.

European Union officials later played down the report. In Brussels, a source linked to the Eurogroup of European Union finance ministers said: "I am not aware of any high-level contacts taking place."

The dollar fell against the yen as sagging stock markets encouraged the unwinding of carry trades.

In the carry trade investors sell low-yielding currencies like the yen to fund purchases of higher yielding assets.

"The yen is generally well-bid on the day. There is still risk aversion in the market. That move in dollar/yen was an offshoot of euro/yen falling,' said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.

Dolan added that a weak opening for the Dow would further undermine the dollar.

While UK rates were held steady at 5 percent, the pound gained 0.3 percent against the dollar to trade at $1.9590. The gains came even as rates are still seen as falling soon with many forecasting a cut will come in June.

"The BoE rate cutting cycle is not over with the next cut likely in June," said BBH in a note to clients. "The focus will be on the minutes (released on May 21) where at least one or two doves will likely have voted for a cut."

Economic data in Britain has reflected a sharply slowing economy, with house prices slipping rapidly.

Elsewhere, the New Zealand dollar slid versus the U.S. dollar after data showing the country's biggest quarterly employment drop in 20 years stoked expectations for its central bank to start cutting rates later in the year.

U.S. weekly jobless claims had little impact on foreign exchange markets.

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