Euro retreats for second straight day

The dollar rose against the euro on Tuesday on fear some euro zone states won't be able to withstand higher interest rates, though further gains will likely require the Federal Reserve to hint at tighter policy.

 Tough inflation talk from European Central Bank President Jean-Claude Trichet last week pushed the euro above $1.40 on expectations of an increase in euro zone interest rates by as early as next month.

 Recent credit downgrades for Greece and Spain reminded investors higher borrowing costs and a stronger currency would make it more difficult for debt-burdened countries to boost growth.

 "The problem with the interest rate driven trade and Trichet's hawkish comments is that you have to see the other issues behind it," said John McCarthy, director of foreign exchange at ING Capital Markets in New York. "Higher rates will be devastating on the peripheral countries." more