The Dollar rose on Wednesday as a surprise advance in US productivity added to gains booked after a Federal Reserve official said the central bank must stand ready to raise interest rates to combat inflation. The Dollar also got a boost from data showing higher-than-expected productivity gains in the first quarter and a lower-than-expected rise in unit labor costs, which reassured investors that inflation, while rising, is not yet spiraling out of control. Some analysts, however, said that investors may be getting too optimistic about the Dollar's outlook, adding that the still-struggling US economy will keep the Fed from raising rates this year. The Fed cut its benchmark rate to 2% last week but hinted it was ready to pause an easing campaign that began in September, when rates stood at 5.25%.
A sharp decline in euro zone retail sales also weighed on the Euro and suggested that the European Central Bank may have to cut its own benchmark interest rate before the year is out.
EurUsd dropped to a session low of 1.5333 before ending to 1.5344 down 1.1%. UsdJpy was little changed at 104.91 after earlier climbing as high as 105.59. UsdChf rose 0.54% to 1.0582. GbpUsd dropped 1.04% to 1.9508 and hit an 11-week low at 1.9503 after weak consumer sentiment and employment data kept investors focused on slower UK growth.
Economists expect the Bank of England to hold interest rates steady at 5% when it meets on Thursday. Inflation has been a top concern in the 15-country euro zone, and markets widely expect the ECB to keep rates at 4% when it meets on Thursday. But analysts say the Euro could falter if ECB President Jean-Claude Trichet acknowledges increased downside risks to growth in the post-meeting news conference. A run of poor economic data has pressured the Euro in recent weeks after it hit a record high 1.6019.