The euro rose on Thursday, adding to its recovery from a six-month low against the dollar a day after comments from European Central Bank policymakers dimmed speculation that its next move on interest rates would be a cut.

Comments on Wednesday, including those from European Central Bank Board member Axel Weber that talk about lower rates was premature, have boosted the euro and prompted broad selling in the dollar, knocking the US currency from its highest of the year on a trade-weighted basis.

Markets offered limited initial reaction to figures showing a bigger-than-expected fall in German unemployment in August [nnBAE001357].

Speculation of an ECB rate cut had intensified in the past month, prompting the euro’s tumble from a record high $1.6038 hit in mid-July, and analysts said that some investors were acknowledging that the dollar’s dramatic rally may have been overdone.

“People are suddenly realising that they may have become overly excited about a rate cut,” said David Page, economist at Investec.

“We saw a wealth of hawkish comments from the ECB yesterday and that has done something to scotch some of the near term expectations for rate cuts.”

Backing up Weber’s comments, ECB Vice-President Lucas Papademos said further rate hikes could be needed if stubbornly high inflation sparked a wage-price spiral in the euro zone. [ID:nLR715001]

Other ECB policymakers rejected the view that slowing growth and lower oil prices would lead to a rate cut anytime soon, even as German economic figures earlier in the week have raised concerns about a serious slowdown in the euro zone economy.

The euro <EUR=> traded 0.3 percent higher at $1.4770 by 0755 GMT, staying above $1.4567 hit on Tuesday for the first time since mid-February.

The dollar index <.DXY> fell more than a third of a percent to 76.780, pulling further away from this year’s high of 77.619 touched earlier in the week.

The U.S. currency <JPY=> fell half a percent to 108.96 yen, also weighed by a near 1 percent rise in U.S. crude prices <CLc1> early in the European trading session.

Sterling struggled on Thursday, falling to a 12-year low on a trade-weighted basis <=GBP> of 89.8, while inching close to a record low against the euro after disappointing UK housing figures offered even more signs of a fragile economy.

ECONOMY WOES

Despite ongoing evidence of U.S. economic weakness, the dollar had benefitted from growing signs since late July that the economic malaise has spread beyond the United States.

Britain and Australia are expected to lower rates at some point to help shield their economies from the threat of recession, while the Federal Reserve is widely seen holding rates steady for months.

At the same time, concerns linger about the future of mortgage lenders Fannie Mae and Freddie Mac as doubts remain about their ability to raise enough capital to sustain themselves in a troubled U.S. housing market, which may weigh on the dollar down the road.

“The dollar remains vulnerable to speculation related to these mortgage firms, with possible dollar selling if no effective measure is struck,” a dealer at a Japanese bank said.

Market players barely reacted to a Japanese newspaper report on Thursday that said the United States, Europe and Japan had planned to intervene and rescue a weak dollar in March. [ID:nT15557]

Source: http://www.afxnews.com

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