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Dollar retreats against euro after earlier big gains

The dollar retreated on Friday after reaching its highest level in two-and-a-half months against the Swiss franc and a one-month high against the euro, as investors took profits ahead of the weekend and month end.

The US currency came under pressure after investors failed to push the euro below strong technical support at US$1.2350. The euro bounced off US$1.2375 and rebounded over a cent in volatile trading to end the New York session right around where it began the month.

In late New York trading, the euro was quoted at US$1.2495, up from US$1.2439 late on Thursday. The dollar was quoted at 109.16 yen, down from 109.63 yen. The dollar was quoted at 1.2618 Swiss francs, down from 1.2677, and 1.3370 Canadian dollars, down from 1.3416. The British pound rose to US$1.8671 from US$1.8608.

The choppy trading conditions come amid growing uncertainty about whether the European Central Bank will act to counter euro strength. Speculation that the central bank may cut interest rates at its monetary policy meeting next Thursday -- or even intervene -- has been behind much of the dollar's rise over the past week.

Hopes of a rate cut were fueled by euro-zone data on Friday showing a bigger-than-expected drop in inflation.

The initial estimate for the euro-zone's annual inflation rate in February fell to 1.6 percent, its lowest level since November, 1999. Final data for January showed a decline of 0.2 percent on the month, giving an annual rate of 1.9 percent, in line with expectations.

Meanwhile, German Chancellor Gerhard Schroeder said he told US President George W. Bush that the euro's level is "worrying" during their meeting on Friday at the White House.

But unlike earlier in the week, when Schroeder's suggestion that the ECB should consider using monetary policy to counter euro strength helped boost the dollar, the market largely shrugged off his most recent comments.

Most analysts don't expect the ECB to cut rates at the upcoming meeting, though they will be paying close attention to the subsequent press conference by ECB President Jean-Claude Trichet for signs of any shift in bias.

Until the market gets the result of that meeting and the US February payroll numbers next Friday, volatile market conditions will probably continue, say market participants.

"There's a lot of uncertainty about the way the price action has evolved this week and people are wary about where the Federal Reserve and the ECB are going," said Daniel Katzive, currency strategist at UBS in Stamford, Connecticut.

"But ultimately, I think this is a correction, and once positions are cleared out, the dollar can resume its downtrend," he said.

Data out of the US Friday resulted in some wide market swings, but generally presented a mixed picture of the US economy.

Fourth-quarter gross domestic product was revised up to an annual rate of 4.1 percent growth from 4 percent.
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