Feb 12, 2007

Euro Trims Losses As More ECB Hikes Seen

NEW YORK (MarketWatch) -- The dollar traded little changed against the euro Thursday, surrendering early gains after the European Central Bank left its key interest rate steady and hinted at further rate increases.

The European Central Bank, which sets interest rates in the 13 countries that use the euro as their currency, left its key interest rate steady at 3.5% on Thursday.

ECB President Jean-Claude Trichet said "strong vigilance" is needed toward price risks, language that in the past has meant that the central bank will raise rates the following month. Markets have largely priced in a March hike. Trichet also said that ECB policy is still accomodative and rates are still low.

"This is suggestive of further rate increases down the road and should see the notion of a pause taken out of the picture," said Brian Dolan, analyst at Forex.com, a division of Gain Capital.

But "so far, the ECB press conference is yielding few surprises," he said. "The ECB is still eyeing higher rates, but the timing is more open-ended."


In New York trading, the euro stood at $1.3025, compared with $1.3012 late Wednesday. The dollar was quoted at 121.18 yen, compared with 120.66 yen.

The British pound traded at $1.9561, compared with $1.9702. The dollar changed hands at 1.2447 Swiss francs, compared with 1.2411 francs.

The euro fetched 157.94 yen, compared with 157.06 yen.

Also on Thursday, the Bank of England left its key interest rate unchanged at 5.25%. The decision was in line with the consensus forecast of economists and follows January's rate increase, which stunned the market.

Haru, carry hit yen

The yen fell after Bank of Japan policy board member Hidehiko Haru said that it was "imperative that we firmly maintain easy monetary conditions" and that the weaker yen was good for the economy.

Comments from Haru "suggested that he would not be voting for a hike in February and, indeed, there was some chatter in the press that a rate hike could now be delayed until the second quarter," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

The yen also continued to weaken on fading hopes that the Group of Seven finance ministers will single out the Japanese currency in any official statement when they meet in Germany Friday and Saturday.

The yen has seen volatile trading lately as market participants debated whether there'll be any coordinated intervention to halt the currency's weakness.

German, French and Italian financial ministers have said that the yen is cause for concern, while Treasury Secretary Henry Paulson has indicated that the yen's weakness reflects fundamentals, such as Japan's low interest rates and an economy that remains soft.

"Carry trade flows returned to the pair with majority of dealers dismissing any possible risk from the G-7 meeting this weekend," said Boris Schlossberg, senior currency strategist at DailyFX.com.

Carry trade refers to the practice of speculators making profits by borrowing the yen at very low costs and reinvesting in higher-yielding currencies and assets.

::source: www.marketwatch.com

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