Dollar nears one-year lows against euro

Samarjit Shankar noted signs of profit taking on the recent gains against the dollar by most Group of 10 currencies
The dollar fell closer to one-year lows against the euro Thursday as mounting hopes for economic recovery from the global economic crisis encouraged risk taking.

At 2100 GMT, the euro fetched 1.4740 dollars, up from 1.4708 late Wednesday in New York.
The dollar rose to 91.03 yen from 90.94 yen.

Trading was volatile, with the euro consolidating gains against the US currency.

Samarjit Shankar of Bank of New York Mellow noted signs of profit taking on the recent gains against the dollar by most Group of 10 currencies, which in addition to the euro includes the yen, the British pound, the Canadian dollar and the Swiss franc.

"The fact that the Swiss franc and Japanese yen also benefited from net buying in the past weeks suggests the dollar sell-off was broad-based," Shankar said.

Euro vs dollar

"Whether the present bout of profit taking is sustained remains to be seen," he added.

Earlier, the single European currency had struck 1.4767 dollars, its highest level since September 25, 2008, as a growing drumbeat of recovery hopes drove traders toward risk taking and away from the safer haven of the dollar.

Dealers said they expect the euro to make further gains against the dollar, possibly to highs around 1.50.

"From a psychological point of view there are hardly any resistance (levels)... around 1.4750 that could stand in the way of the euro moving on to the 1.4965" peak in November 2007, Commerzbank analysts said in a client note.

"And there is little reason for the euro bulls to take profits as the dollar’s (interest) rate disadvantage still supports their view," they added.

The US Federal Reserve has indicated it would continue to keep its key interest rate at almost zero until the world's largest economy solidly recovers from a deep recession that began in December 2007.

Additionally, speculators continue to use the dollar to fund carry trades -- borrowing cheap dollars which they then convert to invest in higher-yielding assets elsewhere.

"It is such a nice environment for carry trades again -- better liquidity, rising risk appetite, lower foreign exchange volumes," said Ulrich Leuchtmann, head of foreign exchange research at Commerzbank.

The Bank of Japan left its key interest rate unchanged at 0.1 percent in a unanimous decision, and maintained its stimulus measures aimed at battling the worst slump in decades.

The world's number two economy was "showing signs of recovery," BoJ governor Masaaki Shirakawa said in comments slightly more optimistic than the central bank's view last month that economic conditions had "stopped worsening."

Federal Reserve chairman Ben Bernanke said this week that the recession in the United States was probably over but warned recovery would be sluggish.

Since December 2008, the US central bank has held its key interest rate at a record low range of zero to 0.25 percent to spur lending and economic activity.

The European Central Bank's main interest rate has stood at a record low of 1.0 percent since last May, but nevertheless gives the euro a return advantage over the dollar.

"Currency investors are searching for yield and the dollar is the lowest yielding because of ultra-low US interest rates," said GFT analyst David Morrison.

"Traders listen to Bernanke and think that this situation will continue for some time," he added.

In late New York trading, the dollar fell to 1.0283 Swiss francs from 1.0317 late Wednesday.

The pound fell to 1.6445 dollars from 1.6486.