FOREX-Dollar extends gains, euro backtracks from key $1.20 level

* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E

(New throughout; previous dateline LONDON)
By Kate Duguid
NEW YORK, Sept 2 (Reuters) - The dollar extended gains on
Wednesday and the euro fell, retreating from the key $1.20 level
reached in the previous session.
Wednesday's counter-trend was attributed by analysts to
profit taking and technical resistance to the $1.20 mark hit
Tuesday, spurred on by comments from European Central Bank chief
economist Philip Lane, who said that the euro-dollar rate "does
matter" for monetary policy. Lane's comments show the ECB was rattled by the appreciation
of the euro and fall in the dollar, said Kenneth Broux, FX
strategist at Societe Generale, suggesting the central bank is
watching inflation closely.
The euro had risen, and the dollar fallen, since last week
when the Federal Reserve announced it would tolerate periods of
higher inflation and focus more on employment. The shift in
policy encouraged traders to sell the dollar, betting U.S.
interest rates would stay low for longer. The chief beneficiary
of the sell-off was the euro, which on Tuesday morning rose to
$1.2011 EUR= , its highest since May 2018.
"Clearly there's lots of momentum behind the euro's rise
with heavy speculative positioning pushing it up and lots of
real money flows in its favor. But Philip Lane's comments
yesterday suggesting that we could see more jawboning from the
ECB in the months ahead definitely helped kick that momentum
back substantially against the dollar," said Karl Schamotta,
chief market strategist at Cambridge Global Payments.
The euro was 0.65% lower on Wednesday at $1.183, having
retraced all of the gains it made since Fed Chair Jerome
Powell's speech last Thursday. The single currency nevertheless
remains up more than 10% from the bottom it hit in March.
Tuesday's breach of $1.20 allowed traders who were long the
currency to take profits on the position.
"It does feel like a technical retreat given the overbought
positioning on the currency. And I think Philip Lane's comments
did serve as a trigger for a bit of a short squeeze on those who
were short the dollar," said Schamotta.
The dollar index =USD was last up 0.59% to 92.783, pulling
out of the 28-month low hit on Tuesday.