The dollar dropped to its lowest in two months versus a basket of major currencies on Monday, as talk of inflation raised speculation that central banks outside the US will soon hike interest rates.
An interview with European Central Bank President Jean-Claude Trichet in this weekend Wall Street Journal suggested that fighting inflation remains the primary focus of policy makers across the Atlantic.
While the Federal Reserve is determined to support the US economy with low interest rates and asset purchases, the ECB and other central banks are likely to hike rates in 2011, putting renewed pressure on the greenback.
The euro was also bolstered by another batch of encouraging news from the euro zone, where Germany continues to drive the region’s resilient economy.
The dollar dropped to a new 2-month low of $1.3684 versus the euro, having plunged from a 4-month peak of $1.2873 set only two weeks ago.
Euro zone private sector activity rose to a six-month high this month. The Markit Flash Eurozone composite output index came in at 56.3 in January, up from 55.5 in December.
And euro zone industrial new order growth quickened in November, led by Portugal, Finland and Germany, official figures showed Monday.
Industrial orders rose 2.1% month-on-month in November, after rising 1.4% in October, the European Union Statistical office Eurostat said.
The dollar was stuck in the mud near $1.60 versus the sterling, unable to pare its recent losses.
At the same time, the dollar weakened to Y82.41 against its Japanese counterpart.
The buck remained below par versus Canada’s loonie, ahead of tomorrow’s key inflation data from Ottawa.
Consumer prices in Canada are forecast to increase at an annual pace of 2.5% in December following the 2.0% expansion in the previous month.
The Federal Reserve will announce its latest interest rate decision on Wednesday following two-day meeting that kicks off tomorrow morning.
No change in policy is expected, with the Fed to retain its near-zero interest rates and $600 billion asset purchase plan.
Tuesday night, President Barack Obama makes his annual State of the Union address to Congress.