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The euro slipped on Tuesday after European Central Bank Governor Jean-Claude Trichet said he shares the view that a strong dollar is in the interest of United States, a comment taken by some market players as showing frustration over the dollar's relentless fall and also an attempt to talk up the currency.
Trichet also told two Finnish newspapers he does not see any significant second-round inflation, prompting traders to dump euro long positions against the dollar, although many traders think the dollar will remain under pressure from a perception that the U.S. central bank is far more reluctant to tighten its policy any time soon.
"I don't take it lightly that Trichet is talking about the dollar rather than the euro. European policymakers became alarmed when the euro rose above $1.45 in 2007 and they started to rein in the dollar's fall," said Minori Uchida, a senior analyst at the Bank of Tokyo-Mitsubishi UFJ, adding that the world's policy-makers are increasingly worried about the dollar's fall.
"In the Group of Seven (G7) statement right after the dollar index hit a record low in March 2008, the G7 said it was concerned about currency moves. The U.S doesn't necessarily want to cheapen the dollar against the euro and the yen. Its target is China. So I wouldn't be surprised if there were international moves (to stem the dollar's fall)," he added.
The dollar rose 0.3% against a basket of major currencies to 74.190, pulling away from a three-year low of 73.735 hit last week.
Despite the dollar's gain on Tuesday, many market players think the U.S. currency will remain fragile given the perception that the Federal Reserve will be in no rush to unwind its easy monetary policy.
The Fed is expected to say it will stick to its plan to complete a $600 billion bond-buying programme in June at its two-day policy meeting starting on Tuesday, with the focus on the post-meeting news conference by Fed Chairman Ben Bernanke on Wednesday - the first regularly scheduled news briefing by a Fed chief in the U.S. central bank's 97-year history.
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