Tuesday May 20, 2008 - 11:08:06 GMT
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Reuters - www.reuters.com
FOREX NEWS-Euro hits 3-week high on ECB rate speculation
(Changes byline, recasts, adds quotes, updates prices)
By Naomi Tajitsu
LONDON, May 20 (Reuters) - The euro hit a three-week high
against the dollar on Tuesday, boosted by comments from a German
think-tank that euro zone interest rates would soon rise.
That helped drag the U.S. unit down to a one-month low
against a basket of six major currencies.
Wolfgang Franz, the president of the ZEW economic research
institute, said that he thought the European Central Bank will
raise rates soon, even as a survey on investors' morale by the
institution unexpectedly worsened for the second straight month.
The ZEW's gauge of expectations for Germany fell to -41.4 in
May from -40.7 in April. Click on [ID:nBAE001218]. Despite his
remarks about an ECB rate rise, Franz said that stellar German
economic growth seen in the first quarter would not continue.
The euro was initially pressured by the weak ZEW reading,
but then shot up on Franz's rate comment. Analysts said the move
reflected market uncertainty about the ECB's rate outlook, given
that the economy is slowing amid persisting inflation risks.
"Even though the number wasn't fantastic, the ZEW president
is saying that the ECB is going to raise rates in the near
future," said Paul Mackel, director of currency strategy at HSBC
"The fact that the euro has responded to contrasting signs
highlights the current sentiment."
The euro was also supported by a rise in German producer
price inflation to a 20-month high, which added to the argument
that the ECB may hike rates from the current 4 percent later in
the year [ID:nL20351479]
The euro climbed a full percent to $1.5674 <EUR=>, clocking
its highest level since late April.
The dollar weakened across the board, falling against a
basket of currencies as euro gains added to downward pressure in
the currency due to persistent jitters about the U.S. economic
outlook and as oil prices hovered near record highs.
The dollar index, which tracks the currency's performance
against units of its six major trading partners, fell more than
0.8 percent to 72.397 .DXY, its lowest since April 24.
The U.S. currency fell 0.4 percent to 103.95 yen <JPY=>.
There was little reaction in currency markets to the Bank of
Japan keeping its borrowing costs on hold at 0.50 percent as
expected on Tuesday. [ID:nT37919]
The U.S. currency had been boosted on Monday after the
private Conference Board's leading indicator index showed a rise
of 0.1 percent in April to match the increase in March, which
followed five straight months of declines.
But while that data backed those arguing the U.S. slowdown
may be bottoming out, others said that further fallout from the
global credit crunch would leave the economy entangled in a
scenario of slowing growth versus higher inflation.
Continuing concerns about the inflationary impact of surging
oil prices has also raised nervousness ahead of U.S. producer
price data due later in the day.
"Since last summer, higher energy prices have pushed PPI up
strongly, and whilst CPI has increased as well, the gap between
PPI and CPI has widened, suggesting that with consumer
confidence so weak, firms have not been able to pass on the full
impact of higher producer prices to the consumer," Calyon said
in a note clients.
Analysts said they were also awaiting a reading of German
business sentiment due on Wednesday to glean a better picture of
whether Germans expect their country's surprisingly strong
economic expansion to continue.
Forecasts are for the Ifo May business climate index to dip
to 102.0 from 102.4 in April ECONDE, and analysts said that a
disappointing reading may sting the euro.
"The market is very sensitive to any signs of deteriorating
sentiment in the euro zone and any risk that the euro zone is
playing catch-up with softness we've seen in the U.S," said Adam
Cole, global head of currency strategy at RBC Capital Markets.
(Additional reporting by Veronica Brown)
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