Thursday, May 8, 2008

Euro Rises Against Dollar as Trichet Highlights Inflation Risk

May 8 (Bloomberg) -- The euro rose from an eight-week low against the dollar after European Central Bank President Jean- Claude Trichet said inflation remains the bank's top priority, signaling policy makers won't cut interest rates anytime soon.

Inflation will stay high ``for a rather protracted period,'' Trichet said at a press conference in Athens following the ECB's decision to keep its main refinancing rate at 4 percent today, in line with economists' forecasts. The yen rose as slumping Asian stocks prompted investors to sell higher- yielding holdings funded in the Japanese currency.

``Trichet hasn't changed his tack one bit on inflation,'' said Adam Myers, director of market strategy at Credit Suisse Group in London. ``Some people had expected a more dovish statement given recent weak data, but that didn't happen. Expectations for rate cuts are likely to be pushed back after today.''

The euro climbed to $1.5410 as of 10:15 a.m. in New York, erasing earlier losses that drove it as low as $1.5285, from $1.5392 yesterday in New York. The region's common currency has risen 4.7 percent against the dollar this year. It was at 160.05 yen, from 161.23 yesterday. The yen strengthened to 103.89 per dollar, from 104.73 yesterday.

The Japanese currency rose versus all 16 most-traded peers as the MSCI Asia-Pacific Index of regional shares fell 0.9 percent, hurting so-called carry trades in which investors borrow in low interest-rate currencies to lend in higher-return ones elsewhere. The yen advanced to 80.08 per New Zealand dollar from 81.85 and advanced to 97.78 against the Australian dollar from 98.67 as Asian stocks declined.

Pound Gains

The British pound rose against the dollar after the Bank of England kept interest rates unchanged at 5 percent. The currency bought $1.9571, compared with $1.9539 yesterday. All but five of 61 economists surveyed by Bloomberg forecast policy makers would leave borrowing costs unchanged to monitor the impact of the three cuts since December.

The New Zealand dollar fell to 77.13 U.S. cents from 78.15 cents after a government report showed the country's employers cut the most workers in 19 years. The Australian dollar pared losses to trade at 94.24 U.S. cents after the number of employed in the nation rose twice as fast as economists expected.

The South Korean won slumped 2.3 percent to 1,049.49 per dollar, the lowest level since November 2005, after the central bank forecast economic growth will slow. The Philippine peso fell 0.6 percent to 42.695 per dollar on concern gains in oil and rice prices will stoke inflation.

Avoiding Cuts

The ECB has avoided rate cuts to curb inflation even amid concern that the fallout from the U.S. subprime-mortgage crisis will spread to Europe, slowing growth. Consumer prices in the 15 countries that share the euro rose 3.3 percent in April from a year earlier after increasing 3.6 percent in March, the most in almost 16 years. The ECB, which aims to keep inflation just below 2 percent, has left rates unchanged since June last year.

The yield gap between two-year German notes and Treasuries rose to 151 basis points today, from 147 basis points yesterday, boosting the euro's yield advantage over the dollar.

The euro weakened against the dollar earlier after the Financial Times said the U.S. intended the April 11 statement from the Group of Seven finance ministers and central bankers to signal it doesn't want the dollar to decline further. The report cited an unidentified senior U.S. official.

Luxembourg Prime Minister Jean-Claude Juncker, who also heads the group of euro-area finance ministers, said May 2 he's still concerned about the euro. U.S. Treasury Secretary Henry Paulson reiterated support May 1 for a ``strong dollar'' policy.

Rogers Sees Rally

``The FT story created some negative sentiment overnight, and Trichet's neutral stance squared some of the sentiment,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York. ``Those who were looking for some dovish words from Trichet got disappointed.''

The dollar will still rally as too many investors are bearish on the U.S. currency, said Jim Rogers, chairman of Rogers Holdings, in Singapore.

Rogers, speaking at the launch of the Barclays Global Agriculture Delta Fund in Singapore today, said the dollar is losing its status as the world's reserve currency and China's yuan would be the ``next best'' replacement in the ``longer term.''

`Phony Optimism'

``Optimism over the global economy and subprime problems was delusive and phony,'' said Tetsuhisa Hayashi, chief currency manager of foreign-exchange trading in Tokyo at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan's second-largest bank by assets. ``The best pick is the yen.'' The yen may rise to 101 a dollar by June 30, Hayashi said.

The European Union said yesterday retail sales declined 1.6 percent in March from a year earlier, the biggest drop since the data began in 1995.

The euro versus the dollar has had a correlation of 0.96 with the price of crude in the past 12 months. A reading of 1 would mean they moved in lockstep.

``The slowdown shown in recent euro-zone data is starting to weigh on the euro,'' BNP Paribas SA analysts led by Hans- Guenter Redeker wrote in a research note yesterday. The euro may fall to $1.48 at the end of this year, while the pound may decline to $1.92, BNP Paribas forecast.

No comments:

BLOG ARCHIVE