Forex - EUR/USD gains, dollar drops as Summers bows out of Fed race

The euro firmed against the dollar on Monday after former U.S. Treasury Secretary Larry Summers removed his name from the list of those in the race to replace Ben Bernanke as head of the Federal Reserve.

Summers was seen as more hawkish over other frontrunners including current Fed Vice Chair Janet Yellen, whom markets feel will keep policy loose to prioritize job creation over keeping inflation in a narrow range if nominated.


In U.S. trading on Monday, EUR/USD was up 0.46 % at 1.3358, up from a session low of 1.3340 and off from a high of 1.3385.

The pair was likely to find support at 1.3254, Friday's low, and resistance at 1.3398, the high from Aug. 28.

Summers, viewed by many as President Barack Obama's first choice as head of the Federal Reserve, bowed out of the race over the weekend, and was perceived as being more likely to wind down dollar-weakening economic stimulus measures than Yellen.

On Tuesday, the Fed will open a two-day monetary policy meeting, with many avoiding the dollar on uncertainty as to whether the U.S. central bank will announce plans to begin tapering its USD85 billion monthly bond-buying program, which weakens the dollar by driving down interest rates to spur recovery.

Elsewhere, the Federal Reserve Bank of New York reported earlier that its Empire State manufacturing index fell to a four-month low of 6.29 in September from 8.24 in August, defying analysts' calls for the index to rise to 9.20.

The number weakened the dollar by fueling sentiments that any Fed plan to taper its asset-purchasing program will be very light and gradual, which should keep the greenback soft for the foreseeable future.

Separately, the Federal Reserve reported that U.S. industrial production advanced 0.4% in August after having been unchanged in July, in line with expectations.

The dollar continued to come under pressure after Friday data revealed that the Thomson Reuters/University of Michigan preliminary U.S. consumer sentiment index fell to a six-month low of 76.8 in September from 82.1 in August, worse than expectations for a decline to 82.0. 

Also on Friday, official data showed that U.S. retail sales rose 0.2% in August, missing expectations for a 0.4% rise. 

Core retail sales, excluding automobiles, rose 0.1% last month, short of expectations for a 0.3% gain. 

Meanwhile in Europe, the euro area's on-year inflation rate hit 1.3% in August, in line with expectations.

European Central Bank President Mario Draghi said Monday that the economic recovery in the euro zone remains “fragile” and reiterated that interest rates will remain at current or lower levels for an “extended period.” 

Elsewhere, the euro was up against the pound and up against the yen, with EUR/GBP trading up 0.07% at 0.8380 and EUR/JPY trading up 0.02% at 132.13.

On Tuesday in Europe, the ZEW Institute is to release its closely watched report on German economic sentiment as well as data on economic sentiment in the wider euro zone.

The U.S. is to release data on consumer price inflation.