Euro stronger as US dollar weakens

Story link: Euro stronger as US dollar weakens

The euro was stronger on Thursday, while the US dollar weakened in relation to several currencies. Analysts could not agree on reasons why the dollar had declined, especially with the Gross Domestic Product deflator, which the US Federal Reserve looks to as its favorite way to measure inflation, newly revised up for the fourth quarter. Many suspected that the increasing likelihood that the European Central Bank will soon raise interest rates, with as many as three separate hikes during the year a possibility, is one factor.

Another possible reason contributing to the dollar’s weakness are rumors that some Asian central banks are interested in diversifying their foreign reserves by buying more euros and fewer dollars. An analyst at Goldman Sachs said that this was the case during the last half of 2005 and that there are signs the trend might be continuing. Comments from the governor of the United Arab Emirates’ central bank added to the talk.

By midday in New York, the dollar had dropped 0.9 percent in relation to the euro to $1.2131. It also lost 0.9 percent to the Canadian dollar to $C1.2629, was down 0.4 percent versus the Japanese yen to ¥117.77, and declined by 0.5 percent against sterling, to $1.7439.

The euro, meanwhile, added 0.5 percent versus the yen to ¥142.39, while it was up 0.4 percent against sterling, to £0.6956.

Elsewhere, the Australian and New Zealand dollars and the South African rand all had a good day. The rand jumped 1.4 percent to R6.17 to the US dollar, the Australian dollar added 1.2 percent to $0.7136 versus the greenback, and the New Zealand dollar gained 0.8 percent to $0.6093 in relation to the US dollar.

The Icelandic krona also staged a bit of comeback, gaining 1.2 percent to IKr70.46 when the central bank there raised interest rates by 75 basis points, to 11.5 percent. This attempt to hold down inflation was more of an advance than had been expected.