Euro rises on possible interest rates hike


  • Business
  • Saturday, 08 Apr 2006

PETALING JAYA: Expectations that the European Central Bank (ECB) would raise interest rates in the coming months pushed the euro to a record against the yen and a seven-month high versus the dollar during intra-day trading on Thursday. 

The 12-nation currency reached a high of US$1.2332 per unit in London trading and touched 144.88 yen before moderating to 1.2224 and 143.95 respectively at the close. 

The slight decline came after ECB president Jean-Claude Trichet said monetary policy makers were unlikely to raise interest rates next month.  

Credit Suisse New York currency strategist Lara Rhame said: “Trichet has surprised markets by saying explicitly he is not going to raise interest rates in May.” 

Analysts said the expectation of a rate increase stemmed from Trichet’s remarks in December and March that the ECB would need to display “vigilance” against inflation prior to rate increases in those two months. 

Despite the ECB president’s late Thursday killjoy comment, futures pricing showed traders still expected a rate increase in June, and for rates to reach 3.25% by December from 2.5% currently. 

Trichet had sent the euro to a three-week high against the dollar on March 2 after saying the ECB was “ready to do whatever necessary” on interest rates. 

Citigroup Global Markets New York currency strategist Eric Darwell said he expected the euro to continue to gain ground, saying “there will be more weakness in the dollar.” Meanwhile, European finance ministers plan to refrain from pressuring China to further strengthen its renminbi, but wish to endorse the Asian giant’s policy of allowing its currency to appreciate gradually when they meet Chinese counterpart Jin Renqing in Vienna this weekend. 

The strategy could put Europe at odds with US lawmakers who are threatening to impose tariffs on China unless it boosts the yuan soon. Morgan Stanley and Royal Bank of Scotland economists say there could be some self-interest for the indulgent move, as Europe would not want a sudden renminbi appreciation to backfire by boosting the euro and weakening exports that are driving the continent’s growth. 

Brown Brothers Harriman & Co New York global head of currency strategy Marc Chandler said the status quo suited Europe as the euro fell more against the renminbi than the greenback did in 2005, making European goods more attractive to Chinese consumers. Merrill Lynch & Co London senior economist Klaus Baader does not see Europe continuing to be patient, however, as the European Union last week teamed up for the first time with the US to accuse China of imposing a discriminatory tariff on foreign car parts to the World Trade Organisation. 

“The complaints would fade if the renminbi was revalued,” Baader said. 

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