Dollar rally fizzles as euro comes off lows

NEW YORK Fri Mar 21, 2014 7:11pm GMT

1 of 4. 100 Euros banknotes are seen on top of Hungarian forint banknotes in this illustration picture taken in Budapest February 6, 2014.

Credit: Reuters/Bernadett Szabo

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NEW YORK (Reuters) - A three-day dollar rally sputtered out on Friday as world markets adapted to possible shifts in U.S. monetary policy and the euro rose on news of a record monthly euro zone current account surplus.

The dollar, whose gains accelerated on Wednesday after the chair of the Federal Reserve hinted that U.S. interest rates may rise sooner than anticipated, eased against other major currencies.

The U.S. dollar index, which measures the dollar against six major currencies, declined 0.12 percent to 80.093, a day after touching a three-week high of 80.354.

"We have had a decent correction and we are coming up for air," said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut. "We've had a modest shift in the Fed's tone, and it's not that dramatic."

Fed leader Janet Yellen on Wednesday seemed to suggest the central bank might end sooner than generally expected its low-interest policies, put in place after the global financial crisis. Such a shift would rattle global financial markets.

Gilmore said the currency market had misinterpreted Yellen's qualified remarks and overreacted, saying, "I think you will see Yellen and others (at the Fed) try to walk all that back."

The euro, which this week had been trading just shy of $1.40, was up 0.15 percent for the day in late New York trading to $1.3798. The shared currency had a Friday trading high of $1.3811 after striking a two-week low of $1.3749 on Thursday.

Speculation that the United States may accelerate the end of ultra-low interest rates had obscured international trade flows and other economic fundamentals that favour the euro over the dollar, said Michael Woolfolk, senior market strategist at Bank of New York Mellon in New York.

"It's a return to the mean," Woolfolk said. "What we are seeing is a return to where the euro wants to be: above the $1.38 level."

The euro was also helped by capital inflows.

With the European Central Bank showing little inclination to ease monetary policy soon, analysts said flows into rate-sensitive money markets are likely to continue alongside robust demand for European stocks and peripheral euro zone bonds.

Data from the ECB on Friday showed the euro zone's current account surplus hit a record in January, when portfolio investments rose to 16.9 billion euros.

"Investors are awaiting for further confirmation from the Fed on its rate path, especially if U.S. data in the second quarter starts to look up," said Geoffrey Yu, currency strategist at UBS. "For us, the dollar is a buy on dips."

CRIMEA TENSIONS SUPPORT YEN, SWISS FRANC

The safe-haven yen and Swiss franc outperformed as traders grew cautious going into the weekend amid rising tension between Russia and the West following Moscow's annexation of Crimea. Russian stocks fell as investors digested the impact of U.S sanctions over the crisis in Ukraine.

EU leaders meeting in Brussels are also mulling wider economic sanctions.

The dollar fell 0.17 percent against the yen to 102.21 after topping out at 102.69 on Wednesday. The dollar was lower against the Swiss franc at 0.8821 francs.

Meanwhile, the Chinese yuan steadied after hitting a 13-month low with traders saying there were signs that the currency may be finding a base.

The yuan has shed more than 1.2 percent so far this week, a record weekly loss, after the central bank last weekend doubled the currency's permitted trading range to 2 percent either side of the fixing.

Many saw this as a signal of official comfort with the currency's recent losses, with the central bank keen to shake out hot money from the market.

(Additional reporting by Anirban Nag in London; Editing by Leslie Adler and Nick Zieminski)

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