The dollar hit a fresh 13-month high against the euro yesterday and sterling continued its slide as relative interest rate differentials once again held sway in the currency market.
With data flow limited and US markets closed for Independence Day, traders were free to extend last week's trends, and with futures markets increasingly pricing in the prospect of three more US rate rises this year, taking the Fed funds rate to four per cent, the dollar made further gains against the euro.
The euro was also hurt by comments from Christian Noyer, a member of the European Central Bank's governing council, who said: "It is possible for a country to leave the euro zone because member states are sovereign."
Mr Noyer's words came just as jitters over the possible eventual break-up of the euro zone - stoked by the collapse of the EU's constitutional treaty and secessionist comments from some Italian MPs - were starting to dissipate.
As a result, the dollar rose 0.4 per cent to a fresh 13-month high of $1.19 against the euro, taking its gains since March to 11.5 per cent.
Mitul Kotecha, global head of forex strategy at Calyon, saw scope for the euro to slump to $1.15 in the next few weeks as momentum pushed the dollar higher.
Sterling, which fell three per cent against the dollar last week, continued to suffer as mounting rate cut expectations eroded the pound's yield support.
Speculation has intensified that the Bank of England's monetary policy committee (MPC) may sanction its first cut of the cycle on Thursday, with data having weakened since June, when two members of the nine-strong committee voted in favour of a cut.
But most analysts believe the MPC will wait until August to cut rates.
However, the mood was bearish yesterday. Alex Patelis, head G10 forex strategist at Merrill Lynch, said UK unemployment was rising at its fastest rate since the last recession, paving the way for four rate cuts by December 2006. He sees the euro at £0.77 by the year-end. - (Financial Times Service)
