LONDON, May 27 - The four-year-old euro completed its remarkable recovery on Tuesday, racing to record highs against the dollar -- as well as the yen -- as demand for the single currency's yield advantage showed no sign of cooling. Traders reported the euro hit a high of $1.1914 in Asian trade, beating the previous record of $1.1886 reached on the day of the euro's launch in January 1999, though it cooled off those gains by the start of European trade.
Dealers say with the euro in uncharted territory, the market is focusing on round-number targets -- with $1.20 up next -- and investors are still happy to keep pushing it higher, given the lack of objection to the move by the European Central Bank. "What we've seen on this whole move is that any pullbacks have been fairly modest and the risk may well be that the same sort of thing will be seen again," said Rob Hayward, senior currency strategist at ABN Amro. "European officials continue to suggest they are not particularly concerned with the performance of the euro...and it may be politicians are holding their breath hoping the central bank will offset some of this with a cut in interest rates."
At 0805 GMT, the euro was fairly steady from late Monday levels at $1.1888 , and was also flat on the yen after hitting an all-time high of 138.92 yen . The dollar was steady on the day at 116.80 yen after Japan's top financial diplomat Zembei Mizoguchi delivered Tokyo's latest warnings that Japan would take action in foreign exchange markets to prevent excessive swings in rates.
EYEING RATE CUTS
Austrian Central Bank Deputy Governor Gertrude Tumpel-Gugerell, who joins the European Central Bank Executive Board on June 1, said on Monday that the current strength of the euro was "bearable" for the euro zone economy. Dealers say the euro's 13 percent rise against the dollar this year has been driven by a combination of the large U.S. trade deficit -- creating a constant outflow of cash -- and attractive euro zone interest rates drawing in investments.
"The fundamental factors supporting the euro have not changed," said Junya Tanase, global markets officer at JP Morgan Chase. "The U.S. is running a current account deficit, which is bad for the dollar, and also U.S. authorities seem to accept a weak dollar and European authorities a strong euro." An ECB rate cut next week might slow the euro -- though perhaps not stop it since U.S. Federal Reserve Chief Alan Greenspan has warned that deflation could be the bank's next challenge, suggesting the possibility of more U.S. rate cuts.
ECB policymakers have made encouraging noises about euro zone inflation, fuelling expectations the ECB could lower interest rates at its June 5 meeting. Board member Eugenio Domingo Solans said on Monday the ECB expected inflation to be below two percent this year while Bundesbank President Ernst Welteke said inflation should fall further from April's 2.1 percent. ECB vice president Lucas Papademos said in comments published on Tuesday that recent data suggested the favourable inflation trend would continue into 2004.
On Tuesday, figures also showed Italian business confidence slipped again in May to its lowest level in 16 months, doing nothing to discourage rate cut expectations. ECB figures showed the euro zone had a net direct and portfolio investment inflow of 12.7 billion euros in March, up from February's inflow of 11.4 billion.//