Euro up amid speculation of interest rate rise

The euro snapped a two-day decline against the dollar on growing speculation the European Central Bank will raise interest rates next month while the Federal Reserve leaves borrowing costs unchanged.

The 15-nation currency also traded near a seven-month high against the yen after ECB Executive Board Member Juergen Stark said markets understood the bank's signal to raise borrowing costs next month, though he discounted a "series" of rate increases. The yen fell as rising US stock-index futures fueled demand for purchases of higher-yielding currencies funded in Japan.

"The ECB is almost certainly going to hike rates soon, if only once and that's supporting the euro," said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. "If inflationary pressures continue, the bank also maintains a more consistent stance than the Federal Reserve. If the Fed hikes, they're coming from such an incredibly low level that it may not be enough of a brake to stanch inflation."

The euro rose to $1.5483 as of 7:16 am in New York, from $1.5467 late on Tuesday. It was at 166.23 yen, from 166.17. The dollar traded at 107.34 yen, from 107.44.

"The markets have understood the Governing Council's signal" about raising borrowing costs next month, Stark. "However, we are not talking about a series of rate increases." ECB President Jean-Claude Trichet said last Thursday an increase in rates next month is "possible".

The implied yield on the July Euribor futures contract held at 5.05 percent yesterday, up from 4.93 percent a week ago. The ECB's main refinancing rate is at more than six-year high of 4 percent.

'Zenith'

"Increasingly hawkish commentary from the ECB has reached its zenith and that has led to a final leg of euro strength," said Michael Metcalfe, the London-based head of macro strategy at State Street Global Markets, which has $14 trillion under management. Metcalfe recommends investors stay "neutral" on the euro versus the dollar before this weekend's Group of Eight meeting in Osaka, Japan.

"We're banging around in a range with euro-dollar," said Adam Cole, head of global currency strategy in London at Royal Bank of Canada, the nation's biggest lender. "One day the Fed is winning and one day the ECB is winning in terms of central banks trying to outdo each other with hawkish rhetoric."

Bank of America Corp lowered its forecast for the yen because the Bank of Japan will probably maintain a neutral stance on interest rates while US and European policymakers signal increases.

The yen is also likely to weaken as stock-market gains show investors' risk appetite is improving, said Tomoko Fujii, head of economics and strategy for Japan at the bank, the second-largest in the US. The yen will fall to 108 per dollar by Sept 30 versus a previous forecast of 105, according to the report.

The US currency traded at $1.9580 against the British pound, from $1.9544 on Tuesday, and was at 1.0404 versus the Swiss franc, from 1.0418.

Agencies

(China Daily 06/12/2008 page17)