The dollar retreated against the euro and higher yielding currencies on Monday as recent comments from Federal Reserve officials and disappointing U.S. data tempered aggressive rate hike expectations. After the dollar's run to a 4-1/2 month high on the euro last week, caution set in ahead of appearances by Fed chairman Alan Greenspan on Tuesday and Wednesday, with the market hoping for hints on when U.S. rates might go up. Markets had taken surprisingly strong inflation and jobs reports earlier this month to mean U.S. borrowing costs should head higher, but weaker than expected consumer confidence and industrial production reports cooled some enthusiasm on Friday. "The dollar continues to fall against the euro because people are now looking to see whether they priced in too much on the rate hike side and they are looking a bit nervously at what Greenspan will say," said Mansoor Mohi-uddin, chief currency strategist at UBS. "If Greenspan gives a relatively dovish speech then people who have been expecting a rate hike will start taking a little bit more of that off the table and that will cause the dollar to give up some more of its gains."
By 1130 GMT, the dollar traded down half a percent at $1.2056 per euro , nearly two cents weaker than last week's 4-1/2 month high around $1.1863. It fell against most other major European currencies, down 0.8 percent against the Swiss franc and weakened one percent against sterling before stabilising. The greenback also weakened nearly one percent against the higher yielding Australian dollar and more than one percent on the New Zealand dollar at one point but traded fairly flat on the day against the yen at 107.74 . The euro rose one percent against the yen before trimming its gains back a touch to 129.98 yen , helped by its rally against the dollar, while the yen also took a hit from a report that authorities had found additional bad loans at Japanese bank UFJ Holdings.
PROGRESS CHECKED
Friday's University of Michigan April consumer sentiment index came in below forecasts while data also showed U.S. industrial production fell in March. Richmond Federal Reserve Bank President Alfred Broaddus said conditions were not yet ripe for an interest rate hike, also eroding dollar support. Fed Governor Ben Bernanke said on Thursday that idle resources, such as untapped labour and production capacity, would help to keep inflation in check over "the next couple of years".
Numbers this week include the March leading indicator at 1400 GMT on Monday and March durable goods orders on Friday. Greenspan appears before the Senate banking committee on Tuesday to talk about the banking industry and then testifies on the economy before the Joint Economic Committee on Wednesday. "We had some dovish comments from Broaddus and Ben Bernanke at the end of last week and a lot of the pressure which built up came off," said Mitul Kotecha, global head of foreign exchange research at Credit Agricole Indosuez in London. "This week, with less on the data front, Greenspan will be the focus and there's a good chance he'll echo the comments from Bernanke and Broaddus." Until Friday, speculation in the market had been growing that U.S. interest rates could rise from a 46-year low of 1.0 percent even as soon as May or June.
In addition traders said the dollar was also likely to drift ahead of a meeting of Group of Seven finance ministers and central bank governors in Washington on Friday and Saturday. Euro zone February industrial production came in slightly ahead of expectations, inching up 0.1 percent from the previous month and 0.6 percent from a year earlier. European Central Bank (ECB) Governing Council member Jaime Caruana said recent economic trends in the euro area were disappointing and that a lack of confidence was hurting growth. ECB Vice-President Lucas Papademos said Europe clearly has a growth deficit when compared to the United States and needs far-reaching reforms to catch up.///