Euro Drops Against Dollar as ECB's Trichet Says Inflation Risks `Balanced'

The euro fell further from a 12-week high against the dollar as European Central Bank President Jean- Claude Trichet said inflation risks are “broadly balanced,” dimming prospects for a boost in borrowing costs.

“The markets at least were expecting a ratcheting up in hawkishness,” said Simon Smith, chief economist at FXPro Financial Services Ltd. in London. “He’s not really stepped it up a gear as some were expecting, hence the fall in euro and small decline in short-term rates.”

The dollar gained versus most of its major counterparts as a report before tomorrow’s payrolls figures showed U.S. services industries expanded at the fastest pace in five years. The pound advanced against the euro as U.K. services companies returned to growth. The Aussie rose versus the yen on an increase in building permits.

The euro fell 1.3 percent to $1.3628 at 10:34 a.m. in New York, from $1.3811 yesterday, when it touched $1.3862, the highest level since Nov. 9. The 17-nation currency decreased 1 percent to 111.52 yen, from 112.63. The dollar rose 0.4 percent to 81.85 yen, from 81.55.

German bonds rose, pushing the yield on the two-year note down 11 basis points, or 0.11 percentage point, to 1.38 percent and narrowing the yield advantage over similar-maturity U.S. debt by 16 basis points to 67 basis points.

“We are seeing a little bit of correction as Mr. Trichet is slightly less hawkish,” said Arne Lohmann Rasmussen, head of currency research at Danske Bank A/S in Copenhagen. “The market has got a bit too long euro-dollar. The comment that inflation risk relates to commodity prices underlines that if it is just commodity prices maybe he is not that worried after all.”

Trichet on Inflation

Faster inflation has been prompted “mainly” by rising energy and commodity costs, Trichet said at a press conference in Frankfurt today. This “has not so far affected our assessment that price developments will remain in line with price stability over the policy-relevant horizon,” Trichet said.

The euro advanced 2.3 percent against the greenback in January as investors bet the European Central Bank will raise borrowing costs before the Federal Reserve.

European inflation accelerated last month to the fastest since October 2008, according to a preliminary estimate by the region’s statistics office on Jan. 31. Trichet said on Jan. 26 the ECB will “do what is necessary” to maintain price stability. The ECB left its main refinancing rate today at a record low 1 percent, as forecast by all 58 economists in a Bloomberg News survey.

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, gained 0.9 percent to 77.820.

U.S. Services

The Institute for Supply Management’s index of U.S. non-manufacturing businesses, which covers about 90 percent of the U.S. economy, rose in January to 59.4, the highest level since 2005, from December’s 57.1.

Nonfarm payrolls climbed by 140,000 workers in January after a 103,000 gain in December, according to the median forecast of 83 economists in a Bloomberg News survey. The jobless rate may have risen to 9.5 percent, from 9.4 percent.

“A strong NFP will solidify the recent upbeat performance in the U.S. economy and likely lead to higher yields, pushing dollar-yen higher,” analysts led by Hans-Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, wrote in a research note.

The pound climbed to a two-week high against the euro as a growth in U.K. service companies boosted speculation the Bank of England may raise interest rates this year. The gauge of U.K. services activity jumped to 54.5 from 49.7 the previous month. Readings above 50 indicate expansion.

‘Gain Ground’

“A strong rise in the services data has allowed the pound to gain ground this morning,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Plc. in London.

Sterling appreciated as much as 1.1 percent to 84.39 pence per euro, the strongest level since Jan. 20.

The Australian dollar gained 0.3 percent to 82.65 yen on signs the economy is still expanding.

The number of permits granted to build or renovate houses and apartments in Australia advanced 8.7 percent in December from November, when they fell a revised 3.9 percent, the Bureau of Statistics said in Sydney today.

A separate report showed the trade surplus was A$1.98 billion ($2 billion) in December, compared with the median estimate of A$1.6 billion in a Bloomberg News survey of economists.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net;

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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