By Kate Duguid
NEW YORK (Reuters) – The dollar extended gains on Wednesday and the euro fell, retreating from the key $1.20 level reached in the previous session.
Wednesday’s counter-trend was attributed by analysts to profit taking and technical resistance to the $1.20 mark hit Tuesday, spurred on by comments from European Central Bank chief economist Philip Lane, who said the euro-dollar rate “does matter” for monetary policy.
Lane’s comments show the ECB was rattled by the appreciation of the euro and fall in the dollar, said Kenneth Broux, FX strategist at Societe Generale, suggesting the central bank is watching inflation closely.
The euro had risen, and the dollar fallen, since last week when the Federal Reserve announced it would tolerate periods of higher inflation and focus more on employment. The shift in policy encouraged traders to sell the dollar, betting U.S. interest rates would stay low for longer. The chief beneficiary of the sell-off was the euro, which on Tuesday morning rose to $1.2011 <EUR=>, its highest since May 2018.
“Clearly there’s lots of momentum behind the euro’s rise with heavy speculative positioning pushing it up and lots of real money flows in its favor. But Philip Lane’s comments yesterday suggesting that we could see more jawboning from the ECB in the months ahead definitely helped kick that momentum back substantially against the dollar,” said Karl Schamotta, chief market strategist at Cambridge Global Payments.
The euro was 0.61% lower on Wednesday at $1.184, having retraced all of the gains it made since Fed Chair Jerome Powell’s speech last Thursday. The single currency nevertheless remains up more than 10% from the bottom it hit in March. Tuesday’s breach of $1.20 allowed traders who were long the currency to take profits on the position.
“It does feel like a technical retreat given the overbought positioning on the currency. And I think Philip Lane’s comments did serve as a trigger for a bit of a short squeeze on those who were short the dollar,” said Schamotta.
The dollar index <=USD> was last up 0.53% to 92.741, pulling out of the 28-month low hit on Tuesday.
(Reporting by Kate Duguid in New York and Elizabeth Howcroft in London; Editing by Steve Orlofsky and Tom Brown)