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Euro retreats from highs as U.S. stocks climb

NEW YORK: Europe's major currencies clung to their gains in late trading on Tuesday despite an afternoon rally in U.S. equities that lifted the dollar against the yen and blunted the euro's earlier assault.

The euro saw a seesaw session, bolting to its session high of 98.60 cents in U.S. morning trading when dealers failed to push it through the bottom of its recent trading range.

Dealers had trouble explaining the swift gains of the euro, the British pound and the Swiss franc. They said some early weakness on Wall Street, talk of a fund's dollar sales for Swiss francs and nervousness about possible central bank action may have helped spark the move.

The euro, the currency common to 11 European nations, had slumped to a one-week low against the dollar overnight but then erased those losses and jumped more than half a percent to a session high of 98.60 cents in New York.

"Essentially we tested the downside of the range. The euro got to 97.60 cents and at the European close, people squared their positions," Mellon Bank currency analyst Marc Chandler said in New York. "At the same time there was talk that a leveraged fund was buying Swiss francs and selling dollars. It all happened very quickly."

But a late-day sprint higher by U.S. stock indices helped the greenback rob Europe's single currency of some of its earlier gains, slapping it back to trade just above 98 cents and pulling the greenback higher against the yen.

"We just keep following the stock market to one extent or another," said Kathy Jones, director of futures research at Prudential Securities. "It continues to be the case that to forecast currencies, you have to forecast the stock market."

Late in the New York session, the Dow Jones industrial average rallied swiftly, packing on gains of about 1.9 percent.

Mainly, however, the market remained focused on key economic data from the United States and Germany later this week and congressional testimony from Federal Reserve Chairman Alan Greenspan on Thursday.

"We are trading in a range. Everyone is waiting for the numbers and Greenspan. We may see some back and forth but nothing significant," Banque Paribas chief trader Dennis Heidt said in New York.

America's top central banker is scheduled to detail U.S. monetary policy and the state of the economy for Congress on Thursday and traders hope he will offer hints on how aggressively the Fed will need to hike interest rates.

Recent data, including U.S. industrial output, which surged 1.0 percent in January, topping December's 0.4 percent gain and economists' forecast for a 0.6 percent gain, suggest the U.S. economy continues to grow too quickly for the Fed's tastes.

Also on Thursday and Friday, the U.S. government plans to release new data on inflation while Germany's Ifo economics research institute is scheduled to release business confidence data on Thursday, which may impact the euro.

Most important may be how Wall Street reacts to the numbers, economists agreed.

"The key influence for the dollar would be the interpretation by the equity markets, and if equity upside potential looked limited, that might cause the dollar to lose ground," said Jeremy Stretch, currency strategist at NatWest Global Financial Markets in London.

Meanwhile, the yen had trailed lower overnight, undermined by a 0.96 percent drop in the Nikkei stock average and comments from Japanese Vice Finance Minister for International Affairs Haruhiko Kuroda.

Kuroda said during Asian trade that the government remained concerned the yen was too strong given the economy's tepid recovery. But U.S. dealers found little fresh momentum to push the dollar back toward the psychologically key 110 area and it therefore reversed course, drifting a little lower.

Elsewhere, sterling GBP fell to test Monday's 1-1/2 week low of $1.5852 after tame British inflation data overshadowed hawkish comments by Bank of England Governor Eddie George.

George said on Monday the British economy was currently growing close to capacity and the pace of growth was unsustainable. But the currency rebounded in line with the euro's recovery.-Reuters