LONDON, Feb 19 - The euro struggled to recoup the previous day's sharp losses against the dollar on Thursday after a two cent fall from a record peak but the market was trying to gauge if the single currency's rally was due a bigger pause. The dollar staged a strong recovery on the euro, yen and Swiss franc on Wednesday, partly helped by warnings from European politicians about the euro's strength. Suspected intervention from the Bank of Japan in early Asian trade on Thursday also served to support the reversal although by the European open the greenback was below the highs it had set by the New York close. "We are seeing large intra-day ranges for the G3 (U.S., euro zone and Japan) currencies and this will continue for a while," said Bilal Hafeez, foreign exchange strategist at Deutsche Bank in London. "Basically, there is a conflict in the market with investors being very short dollars, on one hand, and policy makers introducing intervention uncertainty, on the other."
By 1100 GMT the euro had recovered a third of a percent from its closing levels to $1.2715 but was still two cents below a record high of $1.2927 set early on Wednesday. The dollar held steady on the day at 106.88 yen having rallied by more than one yen on Wednesday from near three-year lows. Some said they thought the dollar reversal had begun in dollar/yen, possibly with the help of well-disguised Japanese intervention, and then spread to other dollar pairs. "Everyone was taken by surprise by the sharp correction of the dollar and snowballing closing of short dollar positions," said Niels Christensen, currency strategist at Societe Generale in Paris. "The market is still shell-shocked and it needs to find its feet."
WHO IS IN THE MARKET?
On Wednesday, French President Jacques Chirac said the euro zone seemed to be bearing the brunt of currency market volatility and German Economy Minister Wolfgang Clement said he had a level in mind at which the European Central Bank should halt the euro's rise against the dollar. Analysts said these remarks fuelled the euro/dollar reversal from its highs, with the market nervous of ECB intervention the closer the currency got to $1.30. However deputy Belgian central bank governor Luc Coene said on Thursday it was naive to think unilateral intervention by the ECB could change the tide but that it was "out of the question" that the United States would be willing to join in. The ECB holds a governing council meeting on Thursday but is not expected to discuss monetary policy. German data showed the economy grew an anaemic 0.2 percent in the fourth quarter of last year as consumer spending remained sluggish and the strong euro held back exports. Euro zone trade numbers showed the bloc's surplus at a higher-than-expected 5.7 billion euros in December. Weekly U.S. jobless claims are due at 1330 GMT, with forecasts for 353,000 new filings compared with 363,000 in the prior week.
The Philadelphia Federal Reserve Bank releases its February manufacturing conditions index at 1700. Forecasts are for a decline to 35.0 versus 38.8 in January. Several Federal Reserve officials are also scheduled to speak.
STERLING SUCCESS
Meanwhile the British pound drew fresh strength from upbeat UK retail sales data, briefly gaining half a cent on the dollar and holding close to one-year highs on the euro. Retail sales rose at the fastest annual pace in more than a year in January, raising the likelihood of more Bank of England interest rate rises to cool demand. The Office for National Statistics said retail sales rose by 0.6 percent in January to stand 6.4 percent higher than a year earlier, the fastest rate since December 2002. Analysts had predicted a rise of just 0.1 percent after shoppers had loaded up on everything from TVs to new clothes at Christmas. Sterling, recently under upward pressure from rate hike prospects, traded at $1.8913 , up a nearly third of a percent on the day but still below the previous day's 11-year high of $1.9140. It was also steady on the day versus the euro at 67.17 pence . A push below 67.11 pence in euro/sterling would bring the pound to fresh one-year high. Sterling also hit a 14-month peak against its trade-weighted index at 105.8 <=GBP>.//www..com