Dollar Kicked as Euro Rises on Rate Hike Expectations

Weakening U.S. data and the promise of a European rate hike has given the euro more leverage over the dollar and is pushing it closer to the psychological 1.50 level.

"We have this asymmetrical relationship where the dollar reacts more to weak data than it reacts to strong data," said Marc Chandler, chief currency strategist at Brown Brothers Harriman.

The euro edged above 1.49 but was trading below it in late morning trading, as the dollar index touched a new three year low below 73. ADP's private sector payrolls were a disappointing 179,000, an indication to some traders that the government's Friday jobs report for April may be at the low end of the range. Consensus is for 198,000 new jobs.

ISM services data also disappointed, falling sharply Wednesday to 52.8 in April from 57.3 in March. A level above 50 still indicates expansion in the sector, but the decline flashes a warning on the consumer economy, and the impact of rising gasoline prices.

The euro has been buoyed by expectations that while the European Central Bank is unlikely to raise rates at its meeting Thursday, ECB President Jean-Claude Trichet could indicate when the next hike will come through the language he uses when discussing inflation expectations.

"He's got to say 'strong vigilance' in order for the euro to sustain these gains and go higher. That would mean June" for a rate hike, said Brian Dolan of "'Closely monitor' means July. Those are the code words."

The ECB raised rates by a quarter point to 1.25 percent last month, signaling the launch of a tightening cycle after two years of record low rates. The Federal Reserve, meanwhile, left its zero rate policy in place last week and signaled it is not ready to change policy yet.

"1.50 is mostly a psychological level," said Dolan, adding that the next level to watch is 151.50, the level from December, 2009.

If Trichet does not indicate a June hike, the euro could slide back to 1.4650 to 1.4750 range. Dolan said Trichet's comments Monday may mean that he is leaning against a June hike. "He said 'the ECB has solidly anchored inflation expectations.' There he was displaying a lot of patience. If I had to flip a coin, I'd say he was going to take the more patient route," Dolan said.

The euro's rise, typically in tandem, with a rally in risk assets was a standout Thursday, as commodities slumped and stocks sold off.

Emerging markets were also lower, as were commodities-linked currencies, like the Australian dollar. Silver futures were down nearly 6 percent, and gold was more than 1 percent lower.

"They're the canary in the coal mine. As far as risk assets go, precious metals, emerging markets currencies and emerging markets stocks are the ones that are seeing the most pressure," said Dolan.

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