Forex Review – Dollar climbs higher versus yen; euro extends fall on Spain debt

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The euro is down almost 2 percent against the dollar this week, its worst performance since the middle of December. After reaching a two-and-a-half-month high earlier in the week following a cash injection by the European Central Bank, through a second LTRO (long-term-refinancing operation), EURUSD fell to a low of 1.3186 today, during New York trading hours, versus the 1.3484 week high..

A broadly stronger dollar pressured the euro, as well as most major currencies, after Federal Reserve Chairman Ben Bernanke cast doubt about a third round of quantitative easing through asset purchases. But the main catalyst behind the single currency’s fall today was a German report showing retail sales fell more than expected, causing concern that the euro zone debt crisis is affecting the largest economy in the euro area.

Meanwhile, adding to concerns was news that debt-burdened Spain challenged the European Union’s new fiscal pact and announced a new softer deficit target of 5.8 percent of gross domestic product compared with the 4.4 percent target previously agreed with the European Union. This reminded investors that the European debt problems are far from being resolved.

Sterling rose for a sixth day against the euro, the longest stretch since November 2010, helped by a report showing U.K. construction rose in February to an 11-month high, boosting speculation the U.K. will avoid a recession. The pound reached its strongest level against euro since February 20, pushing EURGBP down to 0.8312 in European hours before steadying in the U.S. session. Sterling was down versus a broadly stronger dollar, with GBPUSD down to 1.5822 from the New York open price of 1.5901.

The ICE dollar index which tracks the greenback against the currencies of six major U.S. trading partners, gained 0.7 percent to 79.362. The gauge has increased 1.2 percent this week, as the dollar grew stronger. USDJPY hit a nine-and-a-half-month high of 81.86  during the New York trading session.

The yen has been weakening since the Bank of Japan is seen focused on monetary easing, especially after data today showed Japan’s core consumer prices fell for the fourth consecutive month in January, suggesting mild deflation.