The dollar fell against the euro, erasing a weekly gain, after a report that a suspicious plane was intercepted in Rome when it flew into the no-fly zone imposed for the funeral of Pope John Paul II.
"Whenever there are rumors of terrorism, the market sells dollars," said John Cholakis, a currency trader in New York at Natexis Banques Populaires, France's fifth-biggest lender. "It got the ball rolling."
Italian officials sent two F-16 fighter planes to escort a plane to a base south of Rome after "intelligence" indicated a bomb might be aboard, said an Italian air force spokesman who asked not to be named. The plane was searched and released, the spokesman said.
The dollar fell to US$1.2932 per euro at 5pm in New York, from US$1.2857 late yesterday, and dropped 0.1 percent this week, according to electronic currency-dealing system EBS. It fell to ?108.24, from ?108.62, for a weekly gain of 0.6 percent. The dollar reached US$1.28 per euro on April 5, the strongest since February.
"The dollar really never recovered from that airline scare," said Tim Mazanec, senior currency strategist in Boston at Investors Bank & Trust Co.
Euro buyers also emerged as the European currency approached the US$1.28 level, said Enrico Caruso, chief currency trader at currency hedge fund Tempest Asset Management in Newport Beach, California.
"The gist of the day was trying to take out US$1.28," which would have triggered pre-set euro sell orders and exacerbated the euro's drop, he said. "The battle was lost at US$1.28."
Speculation that central banks were selling dollars and buying euros near US$1.28 also fed into the dollar's decline, Caruso said.
The dollar gained in earlier trading, putting it on track for a fourth week of gains against the euro, after Federal Reserve Bank of St. Louis President William Poole said policy makers may need to lift interest rates "more vigorously" should inflation accelerate.
Bigger rate increases by the Fed may widen the gap with Europe and Japan, where policy makers left borrowing costs unchanged this week. Evidence the Fed is concerned inflation pressure is building helped spur the dollar to a seven-week high against the euro and five-month high versus the yen on April 5.
"The potential of continued rate hikes is going to be dollar-supportive," particularly if the Fed opts for bigger rate boosts, said Firas Askari, head of currency trading in Toronto at the Bank of Montreal. "It's just interest rate differentials. Money flocks there."
Demand for the dollar also climbed yesterday after Philadelphia Federal Reserve Bank president Anthony Santomero signaled he wasn't worried about last month's slowdown in job growth, in a speech in Washington.
"Should we see evidence that we are really getting into a more fundamental inflation problem, which I say is not my best guess, then you are going to see the Federal Reserve react more vigorously," Poole told reporters late yesterday after a speech in St. Louis. He doesn't vote on interest rates this year.
European Central Bank policy makers yesterday left their benchmark interest rate at 2 percent, and the Bank of Japan this week kept borrowing costs near zero. The Fed has lifted its target a quarter point seven times since June, to 2.75 percent.
The dollar may struggle going into next week as a government report is projected to show the US trade deficit probably widened in February to US$59 billion.
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