Financial News

The euro fell from a ten-week high against the dollar on Thursday after the European Central Bank indicated that it might have reached the end of its monetary tightening cycle.

The ECB, as expected, raised eurozone interest rates by 25 basis points to 4.25 per cent after its policy meeting, saying that the move was aimed at preventing the growing risks poised by rising inflation.

However, Jean-Claude Trichet, ECB president, said the move contributed to achieving the central bank's aim of reigning in price pressures in the region and warned of the risks of slowing growth.

Analysts said the comments were less hawkish than expected, and implied the rate rise could be a one-off, in contrast to the series of rate rises that were priced into the markets.

"The expectation was that the risk of a rate hike would be left on the table," said Divyang Shah at Commonwealth Bank.

"The message today is that rates at 4.25 per cent are enough. There is no [hawkish] policy bias."

The euro, which earlier in the session rose to a high $1.5909 the dollar, lost 0.9 per cent to $1.5740 and eased 0.3 per cent to 0.7940 against the pound.

Earlier in the session, the dollar showed little reaction to data showing the US economy shed 62,000 jobs outside the agricultural sector in June.

Analysts said the data was in line with expectations and did nothing to change US interest rate expectations.

Meanwhile, the pound lost ground after a survey suggested activity in the UK services sector dropped to its lowest level in six years last month.

The UK services purchasing managers' index dropped from 49.8 in May to 47.1 in June, way below forecasts for a reading of 47.5.

Analysts said the figures were particularly worrying given the dependence of the UK's economy on the services sector and added to a series of dismal UK economic data that had heightened speculation that the economy was headed for recession.

Adding to the gloom was the Bank of England's Credit Conditions Survey for the second quarter, which reported the availability of credit to UK households and companies had contracted and was expected to fall further in the next three months.

"Along with news that service sector activity contracted in June, tighter credit conditions heaps pressure on the Bank of England to hold off from raising interest rates despite current elevated inflation levels," said Howard Archer at Global Insight.

The pound fell 0.5 per cent to $1.9831 against the dollar.

Meanwhile, the yen came under pressure, falling 0.8 per cent to Y106.72 against the dollar and dropping 0.3 per cent to Y211.58 against the pound.

This was despite a further sell-off in global equities, which previously has boosted demand for the safe haven of the low-yielding yen.

However, Derek Halpenny at Bank of Tokyo Mitsubishi there were two reasons why the negative correlation between falling equities prices and and a rising yen had broken down.

First, he said, the fall in equities was caused by surging oil prices, which was bad for Japan's terms of trade given its dependence on energy imports.

Second, Mr Halpenny said there has been an upsurge in demand for overseas assets from Japanese retail investors, who face ultra-low interest rates of 0.5 per cent at home.

"These factors may help explain the limited gains for the yen," he said. "However, they do not change our view that the yen should continue to strengthen."

Mr Halpenny said yields abroad remained crucial in determining Japanese investors' appetite for overseas assets and he expected a gradual decline in yields - in particular in the US - to persist.

"Any bounces in dollar/yen are unlikely to be sustained and would offer a good selling opportunity."

Elsewhere, the Swedish krona rose 0.4 per cent to SKr9.4420 against the euro after the country's central bank raised interest rates by 25 basis points to 4.5 per cent and said it expected to tighten monetary policy twice more this year.