Monday April 28, 2008 - 10:20:41 GMT
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Reuters - www.reuters.com
FOREX NEWS-Euro rises; ECB hawkish despite soft German CPI
(Changes byline, updates prices, adds comment)
By Toni Vorobyova
LONDON, April 28 (Reuters) - The euro rose versus the dollar
on Monday after European Central Bank policymakers continued to
warn of upside inflation risks even as data showed consumer
prices falling in five German states in April.
ECB President Jean-Claude Trichet and Governing Council
member Yves Mersch both said risks to price stability remained
on the upside, with Trichet adding that there were no grounds
Their comments suggested the ECB is not ready to start
cutting interest rates from 4 percent soon, even with regional
data pointing to a likely negative monthly reading on German
inflation for April.
"For the time being, the ECB remains on a fairly hawkish
bias -- not arguing for higher rates, but certainly not allowing
speculation that they are changing their mind (and cutting) any
time soon," said Michael Klawitter, currency strategist at
Dresdner Kleniwort in Frankfurt.
He added that German prices were affected by Easter -- and
the related spending and holiday boom -- coming in March rather
than April, and that inflation would likely rebound in May.
German national data is due later on Monday, followed by
the figure for the euro zone as a whole on Wednesday.
By 0944 GMT, the euro was up 0.3 percent at $1.5668, though
still more than 3 cents below last week's record high <EUR=>.
The euro also added 0.25 percent to 163.62 yen <EURJPY=>.
A surprising jump in a German consumer sentiment gauge
[ID:nBAE001184] also helped the euro, suggesting that the euro
zone's biggest economy may not be in as bad a shape as indicated
by a weak Ifo business confidence gauge last week.
Meanwhile, rising commodity prices -- with oil hitting a new
record high CLc1 -- kept the dollar on the back foot.
However the euro's gains versus the dollar were capped by
speculation that the U.S. Federal Reserve could indicate it may
be approaching the end of its cycle of drastic interest rates on
Wednesday, after delivering one more cut to 2 percent.
Such bets helped the dollar hit a two-month high of 104.82
The Fed has slashed borrowing costs by 3 percentage points
since September in response to the credit crisis that erupted
last year, but some speculate that climbing fuel and food prices
could put the brakes on any more big cuts.
U.S. short-term interest rates futures are even indicating a
20 percent chance the Fed may hold rates at 2.25 percent this
week FEDWATCH, rather than cutting them.
However such pricing leaves the dollar vulnerable to a
potential sharp correction if the Fed remains dovish.
"Rate cut speculation has been scaled back considerably over
the last days," Commerzbank Corporates & Markets said in a note.
"Hence, if the FOMC statement ... shows that the Fed's focus
is still on downside risks to growth on the backdrop of rising
unemployment and dwindling private consumption and therefore
sounds rather dovish to the market, we see considerable
potential for renewed Fed rate cut speculation, which would put
the dollar under strong selling pressure."
(Editing by Mike Peacock)
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