The dollar surged to an eight month high on the yen and gained as much as two percent on the Australian and New Zealand dollars on Thursday as markets bet new U.S. inflation data releases may boost rate hike prospects. Sterling joined the high-yielding commodity currencies in giving ground to the greenback as investors continued to unwind growth-oriented trades on concerns about higher oil prices and U.S. interest rate rises. The euro fell after comments from Saudi Arabia's vice central bank governor who told in an interview the single currency was still not fully competitive as a reserve currency. "Inflation numbers are the theme for the next couple of days. Strong numbers would lead to further weakness in equities and the dollar would rise against the yen," said Ian Gunner, head of foreign exchange research at Mellon Bank in London. "The Saudi story also was partly significant today. It was a catalyst to move the euro through a level and trigger some stop-loss selling," he said.
By 1130 GMT, the dollar was more than one percent up at 114.30 yen , just below its eight-month peak of 114.41 yen. The euro was one third of a percent higher at 135.14 yen , having hit a two-month high of 135.85. It was at $1.1824 , less than a cent above a recent five-month trough, and 0.6 percent down on the day. Since the euro's launch, there has been speculation about how quickly it would be accepted as major rival to the dollar in central banks' foreign currency reserves and rumours of central bank buying sometimes sweep through the market. Muhammad Al-Jasser, vice governor of the Saudi Arabian Monetary Agency, told the euro had not yet gained a competitive status against the dollar as a reserve currency. "People are not going to switch to euros until European financial markets become more competitive, deeper, more liquid and diversified," he said. The remark helped lift the dollar across the board, putting both the New Zealand and Australian dollars further under pressure as investors continued to unwind carry trades, popular last year as a way to exploit their higher interest rates.
SPREADING CONFUSION
Mellon's Gunner also said the overall tone in currency markets was one of uncertainty and confusion as an unclear timing of future U.S. rate hikes and steep oil prices were powering a rise in investor risk-aversion. "The fear is the impact of rising inflation from high oil prices, higher U.S. rates and people are very confused what is going on. There is a lot of global market uncertainty as we are undergoing a shift in interest rates," he said. Data showing a wider than expected U.S. trade gap briefly harmed the dollar on Thursday but expectations of rising interest rates returned to buoy it ahead of U.S. inflation data. "In the long term the dollar will have to weaken because of the current account deficit," said Mansoor Mohi-uddin, chief currency strategist at UBS in London. "But in the short term people are more interested what will happen with CPI. If CPI is strong, the dollar may gain (on higher rate expectations). Ahead of the numbers, the market is stuck in the twilight zone." Producer prices, due at 1230 GMT, are expected to rise by 0.3 percent in April compared with a 0.5 percent gain in March. April retail sales are also due at the same time, and expected to show a fall from the previous month's biggest gain in a year. Friday brings the consumer price numbers. Federal Reserve Chairman Alan Greenspan speaks at 1500 GMT on financial literacy.
EUROPEAN PICK-UP
Meanwhile, Germany and Italy showed stronger than expected first quarter growth, following a positive growth surprise from France on Wednesday. Both economies expanded 0.4 percent on the previous quarter, despite expectations for a slower increase, while France grew 0.8 percent. However, the euro was little moved by the upbeat signs from the region as investors focused on U.S. rates and oil. In Japan, the bellwether Nikkei share average <.N225>, already under pressure on worries about a slowdown in the Chinese economy, fell 2.95 percent to a three-month closing low and damaged the yen. Foreign investors have piled into Japanese equities in the past year in expectation that Japan would be one of the chief beneficiaries of a global economic recovery.///