Dollar rises despite hint of euro rate increase

AP News
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Posted: Jun 09, 2011 4:07 PM
Dollar rises despite hint of euro rate increase

The dollar climbed Thursday as traders sold euros after the head of the European Central Bank hinted that a raise in interest rates was likely in July, but didn't suggest a series of increases that some investors had hoped for.

Higher rates tend to increase demand for a currency. Jean-Claude Trichet's hint about the July increase was expected, as inflation risks remain high.

"It sounds like the ECB will take its time raising rates," wrote Jennifer Lee, a BMO Capital Markets economist, in a research note.

The dollar was also boosted by a government report that showed the U.S. trade deficit unexpectedly narrowed in April.

A narrower trade deficit would suggest that more jobs could go to U.S. workers making products, rather than to workers overseas, supporting the economy. U.S. exports hit a record high in April.

The trade deficit shrank 6.7 percent in April to $43.7 billion, the smallest gap since December.

In late trading Thursday in New York, the euro dropped to $1.4509 from $1.4575 Wednesday. Earlier, the euro fell as low as $1.4476, its first time below $1.45 since last week.

The dollar rose to 80.26 Japanese yen from 79.94 yen, while the British pound fell to $1.6369 from $1.6390.

The euro has risen steadily this year, except for a downturn in May which it has mostly regained, because of expectations of higher rates while the Federal Reserve keeps its key rate near zero. The euro has managed to climb despite investors' continuing fears of deepening debt crises in the euro bloc's weakest countries.

A rate increase could make life harder for Ireland, Greece, and Portugal, which are struggling with heavy debts. European financial officials are still squabbling over terms for an extended aid deal for Greece in the event that the country runs out of money next year. The lack of agreement has left investors anxious about a Greek debt default that could hit the continent's banking sector and push up borrowing costs for Ireland and Portugal.

Also complicating the European financial talks is that receiving a second batch of aid depends in part on Greece making more government spending cuts. International inspectors criticized Greece's slow steps in making reforms in a report obtained by the Associated Press Thursday.

In other trading Thursday, the dollar dipped to 97.38 Canadian cents from 97.92 but rose to 0.8420 Swiss franc from 0.8371 Swiss franc.