LONDON, Jan 16: The dollar bounced back sharply on Wednesday after comments from senior European Central Bank officials undercut market assumptions that Eurozone interest rates were a one-way bet to hold or go higher.

Dealers said reported remarks by Luxembourg central bank head Yves Mersch, who sits on the ECB governing council, that there were mitigating factors on inflation suggested that the ECB could be softening its position.

Up to now ECB governor Jean-Claude Trichet has been highlighting the risk of inflation as a continuing danger that must be kept in check at all costs including higher interest rates if necessary.

Dealers said Mersch appeared to confirm remarks earlier on Wednesday from German central bank head Alex Weber, suggesting to some that the ECB could be preparing the markets for a change in its monetary policy stance.

Speaking earlier on German inflation data, Weber had said: “We are watching price developments with concern, in Germany as well as in the entire euro area.” At the same time, however, Weber warned against overstating recent price increases which he said should ease progressively.

Taken together, Mersch and Weber’s comments may have been a first step in steering market expectations towards lower Eurozone interest rates, said Thomas Stolper, an economist with Goldman Sachs.

In the event, the euro went into a very sharp reverse, shedding recent gains to near record levels that had been made on the view that ECB rates would hold or go higher while US lending costs would fall, perhaps quite drastically.

At the same time, news that US consumer inflation had hit a 17-year high of 4.1 per cent in December may also have given pause for thought as to where US interest rates were going.

In late Wednesday trade, the euro was quoted at $1.4645, down from $1.4806 in early deals and $1.4803 late Tuesday.

The euro also fell against the yen, to 157.25 yen from 158.00 yen.

The dollar was at 107.40 yen, recovering from overnight lows of 105.97 yen — which was the lowest point since May 2005 — and early European deals at 106.11 yen. It was at 106.71 in New York late Tuesday.—AFP