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Euro jumps vs. the dollar on rate-hike expectations

March 18, 2011 |  6:52 pm

The dollar soared against the yen Friday, just as the Group of 7 industrialized nations hoped it would as they intervened to weaken the Japanese currency.

But the euro was the day’s big winner, rallying not just against the yen but also against the greenback.

Trichet The euro rose to $1.418, up from $1.403 on Thursday and the highest since it briefly spiked to $1.421 last November. It was worth $1.29 as recently as Jan. 7.

“Winner” is a relative term here: European exporting companies can’t be happy with the currency’s strength, which makes their goods more expensive for foreign buyers.

They can blame the European Central Bank. The euro has been surging against the dollar this year on expectations that the ECB will raise interest rates sooner than later to combat inflation pressures. Higher interest rates tend to boost a currency’s value by attracting global capital.

Anticipation of higher rates was fortified Friday: ECB President Jean-Claude Trichet declined to pull back from his March 3 signal that the bank was likely to raise its benchmark short-term interest rate at its April 7 meeting.

From Bloomberg News:

“I have nothing to add, nothing to withdraw,” Trichet told reporters today in Frankfurt when asked if policy makers are still in a posture of strong vigilance, ECB code words for an imminent rate increase. “No new message at all,” he said.

The ECB has been holding its benchmark rate at 1% since May 2009.

The U.S. Federal Reserve has kept its key rate between zero and 0.25% since December 2008. But unlike the ECB, the Fed shows no sign of wanting to tighten credit, even as inflation pressures rise.

Fed policymakers reiterated this week that they were likely to hold their rate at “exceptionally low levels ... for an extended period” to underpin economic growth.

While the Fed’s critics say the central bank is playing a dangerous game by keeping monetary policy so loose, the ECB also risks danger if it goes ahead with a rate hike: An increase could wreak havoc with Europe’s financially struggling countries, including Greece, Portugal, Ireland and Spain.

The euro's jump Friday pushed the so-called DXY currency index down 0.6% to 75.57, its lowest since December 2009. The DXY measures the dollar against six other major currencies, but the euro has by far the biggest weighting in the index.

-- Tom Petruno

Photo: ECB President Jean-Claude Trichet. Credit: Alex Domanski / Reuters