HOPES FOR a rise in euro zone interest rates drove the euro higher in early trade yesterday.

However, European central Bank president Jean Claude Trichet later doused expectations of an imminent rate increase, saying inflation would remain contained.

The impetus for the advance were weekend comments by ECB board member Jose Manuel Gonzalez-Paramo, who said interest rates will have to rise if inflation doesn’t start to fall by the end of this year.

However, the euro was roughly unchanged against the dollar as the session progressed.

The dollar weakened against the euro throughout most of January on expectations that rising inflation would prompt the ECB to raise interest rates much earlier than the US central bank.

“Those expectations were far too speculative and thus why we have seen a sharp turnaround this past week,” said Jessica Hoversen, foreign exchange and fixed income analyst at MF Global in Chicago.

A number of recent positive economic reports have helped improve the US economy’s outlook and suggest the Federal Reserve may not need to stimulate the economy any further.

Ms Hoversen said profit-taking and a disappointing read of German industrial orders helped weaken the euro versus the dollar.

In early afternoon New York trading, the euro slipped 0.1 per cent to $1.3577. It hit a low of $1.3508 on electronic trading platform EBS.

The euro had hit a two-week low, falling below the current 100-day simple moving average, a key support, at around $1.3532. Investors focused on $1.3500, followed by $1.3480, the 38.2 per cent retracement of the January-to-February rally.

Market participants are starting to factor in higher US interest rates for 2012, particularly after Friday’s jobs report, which showed a decline in the unemployment rate to 9 per cent last month. – (Reuters / Bloomberg)