Euro Hits Record High Against Dollar, Then Pulls Back

The euro (search) hit another record high against the dollar on Tuesday at $1.1932 as demand for higher-yielding euro-denominated assets (search) overshadowed solid U.S. economic data.

But in a long awaited pullback, the euro's advance was reversed as investors booked profits after a 2.7 percent gain against the greenback over the last four sessions. The single currency slipped below a support level around $1.1850. Some traders expect it to retreat to around $1.1750 before mustering a first attack on the key $1.20 mark.

"People are taking a breather on the dollar selling, with a little profit-taking against the euro and yen after making the new highs on the data this morning," said Russell LaScala, chief spot dealer at Deutsche Bank in New York.

U.S. consumer confidence (search) rose in May, but less than expected, while low mortgage rates spurred home buying in April, reports showed on Tuesday morning.

"The low interest rates that are going to help the housing market is not something that is going to be a factor in helping lift the dollar," said Steven Englander, chief North American foreign exchange strategist at Barclays Capital in New York.

"What the FX market would want in order to buy dollars are data to suggest within a reasonable time that the Fed is going to raise interest rates in light of a stronger economy," said Englander, who said these data were not going to change anyone's view that the dollar will remain weak.

Some traders said that the appeal of higher-yielding euro zone bonds may be waning as investors start to bet the European Central Bank may cut interest rates at its next policy-setting meeting on June 5, which could start to weigh on the euro.

Others said market sentiment has become too slanted in favor of the euro, considering the area's lackluster economic performance.

"When mom and pop start talking about the euro's rally, maybe it's a little bit overdone, just from a contrarian point of view (search)," said John Kosar, senior research analyst with Bianco Research.

The euro hit a record high $1.1932 in a knee-jerk sell-off after the U.S. data was released before dropping back to $1.1817, below Monday's New York close. The euro first traded, at $1.1747, on Jan. 1, 1999.

U.S. consumer confidence rose in May to a six-month high, according to the Conference Board (search), but while rising consumer confidence is welcomed in the market, it is not a component of gross domestic product, whereas new home sales are.

April U.S. new home sales rose 1.7 percent, more than expected, while existing home sales last month climbed to an annualized rate of 5.84 million, also more than expected.

The ECB meets next week to decide if it will cut its benchmark interest rate of 2.50 percent, which could spur borrowing and investment in the euro zone's anemic economy.

Even if the rate differential with the United States narrows -- the U.S. benchmark interest rate (search) is 1.25 percent -- the dollar still faces the pressure of a steady outflow of cash due to the record U.S. current account deficit.

Since the start of 2003 the euro is up roughly 13 percent on the dollar and 11 percent on the yen.

Against Japan's currency, the euro reached a record 139.14 yen before falling back to 138.67 yen, flat on the day.

The dollar briefly slid to a one-week low against the Japanese yen of 116.21 before rebounding to 117.27 yen , up 0.4 percent on the day.

Traders said they saw big orders for dollar purchases from Japanese banks come into the market, consistent with a pattern of dollar/yen buying at these levels that has been attributed to covert yen-weakening intervention by the Bank of Japan.

Investors kept in mind Tuesday's warning from Japan's top financial diplomat Zembei Mizoguchi that Japan would act to prevent excessive swings in currency rates.

The greenback fell versus the Swiss franc to a fresh four-and-half-year trough of 1.2786 francs .

Sterling rose to a four-month high of $1.6471 after the U.S. data before retreating late in the day to $1.6381.