LONDON, April 16 - The euro gained on the dollar and hit two-month highs versus the yen on Wednesday as economic worries in the United States diminished dollar bulls' hopes for a rally and overshadowed upbeat U.S. corporate results. Some dollar bulls had hoped that the dollar would rally with the U.S.-led war against Iraq appearing to draw to a conclusion, but persistent concern over the economic health of the United States has kept market sentiment strongly in check. Analysts said an equities rally in New York, signalled by U.S. futures, was unlikely to change the greenback's fortunes much even as investors seek clues from the corporate earnings releases about the state of the U.S. economy. "We are seeing some unwinding of expectations of a strong post-war economy. Recent economic data checked optimism about U.S. growth," said Michael Metcalfe, senior strategist at State Street in London.
"The euro is not an economic winner either but at the moment the dollar trend is dominating," he said. The euro was up a third of a percent since late Tuesday trading against the dollar at $1.0832. Against the yen, it was up 0.40 percent , while the dollar was steady on the Japanese currency at 120.34 . The dollar was also down nearly half a percent on the Swiss franc , which itself has been suffering recently as investor appetite for risk increases in the wake of last week's fall of Baghdad and an apparent U.S.-UK victory over Iraqi President Saddam Hussein.
ECONOMIC DOLDRUMS
Rising European stocks also underpinned the positive sentiment for the euro early in the session, although much of the earlier gains that took major European indices up to three-month highs were erased later in the day. "It is a dollar story. The dollar is unable to gain ground despite equities and the euro is gaining by default," said Rob Hayward, senior foreign exchange strategist at ABN Amro in London.
"Investors are cautious about the future in the U.S., but also they are looking for higher-yielding currencies and that may also be supporting the euro against the dollar." On Tuesday, data showed that U.S. industrial production posted a worse than expected fall in March. A sharp decline in the April Empire State Manufacturing survey by the New York Federal Reserve was also seen boding ill for the closely-watched Philadelphia Fed's manufacturing business outlook on Thursday. More clues about economic performance may come from the 1230 GMT releases of U.S. housing starts and consumer inflation data. U.S. consumer prices, due out at 1230 GMT, are seen rising 0.4 percent in March after a 0.6 percent uptick in February, "The U.S. inflation numbers are not in the market's focus, but we saw some tentative signs that cost price pressures are beginning to rise and that is bad for the dollar," said Metcalfe.
"The dollar is generally a fixed income currency and with higher inflation that would raise questions over the fixed income side of funding the U.S. current account," he said. Euro zone consumer prices rose at their fastest monthly pace in nearly two years in March, a Brussels data release showed earlier on Wednesday.
YIELD PLAYS
Meanwhile, uncertainty about the U.S. economy has prompted market players to focus on interest rate differentials. The yen, with its short-term rates near zero and 20-year bond rates below one percent, is the least attractive, while the euro, the Australian dollar and the Canadian dollar are the main beneficiaries of such trade. The dollar is also out of favour on an interest rate basis, though not as much as the yen. The Canadian dollar enjoyed an additional boost after the Bank of Canada lifted its interest rates on Tuesday. The central bank raised its key overnight lending rate to 3.25 percent from 3.0 percent. That compares with the U.S. federal funds rate, which is at a four-decade low of 1.25 percent, and the European Central Bank's benchmark interest rate at 2.50 percent. As a result, the Canadian dollar was supported at a one-year highs versus the yen and the Australian dollar was at levels close to four-year highs versus the yen .
The Canadian dollar was at three-year highs versus the U.S. dollar and the Australian dollar hit a one-month high versus the U.S. unit .//