The last time the euro traded above $1.4000 was November 8, 2010. ECB President Trichet lit the blue-touch paper and appears to have set the stage to fuel a rally back above there in the coming days and weeks as investors buy into the rising yield theory. His signal that the ECB must remain vigilant against inflationary pressures and his warning that it should be no surprise if the central bank lifts rates at its next meeting continues to create demand for the single currency ahead of a key U.S. employment report. On the other side of the report, which showed an additional 192,000 jobs were created in February, euro bulls failed at the finish line to trigger stops with the euro recoiling from a session high at $1.4001 to a fresh low at $1.3944.
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Euro – The euro has traded to as high as $1.3977 ahead of Friday’s U.S. non-farm payroll reading and has rallied close to its best level in a month against the pound and to a five-week high against the Aussie dollar. Investors will be listening for further clues in addresses from Trichet and Bini Smaghi on Friday. Mr. Trichet’s hawkish tone on Thursday caught money markets on the hope and sent yields sharply higher in anticipation of a far earlier official increase in short rates than any had dared predict. The step-up in rhetoric is seen in some quarters as a red-rag to lawmakers who have been dragging their feet in solving the lingering debt crisis and implementing tougher fiscal discipline on profligate nations.
U.S. Dollar – The approach of the labor market report is the only thing that had kept the euro beneath $1.4000 as investors brace for a big number. The problem is that a big number might not be enough to convince investors that the Fed might change its perspective on the economy. The dollar’s fate is sealed until the FOMC revises its take on the pace of healing in the labor market. Prior to today’s reading the dollar index was steady at 76.53. The recent dip in initial claims to the lowest in three years had primed expectations that the reading would snap back from weather-induced repression in January. Job creation was healthy across the board during February with employees at government agencies the only losers. Manufacturing and construction sectors added workers while private employment growth of 222,000 was beyond expectations. Because the report was not beyond overall expectations, investors initially tried to weaken the dollar, although that attempt has failed miserably.