Dollar falls after Trichet says rate hike possible

AP News
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Posted: Mar 03, 2011 3:37 PM
Dollar falls after Trichet says rate hike possible

The dollar fell against the euro Thursday after the head of the European Central Bank said an interest rate increase was possible in April.

Jean-Claude Trichet's comments about the threat of inflation from climbing food and energy prices encouraged investors to buy euros. Lifting a region's key interest rate is a measure meant to counter inflation, and the higher rate often causes the currency's value to rise.

The Federal Reserve, on the other hand, is expected to keep its own key rate near zero. Fed Reserve Chairman Ben Bernanke has said he sees inflation from rising gas prices as only a temporary and modest threat to the economy. Some analysts have said a U.S. rate increase is unlikely until late next year.

The euro traded at $1.3959 late Thursday, up from $1.3860 Wednesday. Earlier in the day, the euro reached $1.3975, its highest point since Nov. 8.

The ECB left its key interest rate at 1 percent on Thursday. Trichet, in unusually straightforward remarks, said an interest rate increase next month was "possible" though "not certain," and warned that "strong vigilance" was needed to ensure that rising food and energy prices did not lead to broader prices increases.

The central bank also raised its inflation forecast for 2011 because of pressures from rising food and energy prices.

"The ECB will do whatever is necessary to maintain price stability, and further rate hikes cannot and should not be summarily dismissed," said Michael Woolfolk, a currency strategist with the Bank of New York Mellon.

In other trading late Thursday, the dollar rose to 82.37 Japanese yen from 81.91 yen, while the British pound dropped to $1.6273 from $1.6325. The dollar was flat at 97.19 Canadian cents and it gained to 0.9319 Swiss franc from 0.9240 Swiss franc.