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Thursday June 5, 2008 - 22:55:42 GMT
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FOREX NEWS-Trichet rate hike signal sparks broad euro rally


Thu Jun 5, 2008 4:51pm EDT

(Recasts, updates prices, changes byline)

* Euro surges as Trichet flags July rate hike

* Dollar rises to three-month highs versus yen

* ECB, BoE leave rates unchanged as expected

By Lucia Mutikani

NEW YORK, June 5 (Reuters) - The euro surged on Thursday after European Central Bank President Jean-Claude Trichet signaled a July rate increase for the euro-zone, undercutting a recovery in the dollar that had started to gather steam.

Trichet's hawkish remarks, which were made following the ECB's expected decision to leave its main lending rate unchanged at 4 percent, pulled the euro from three-week troughs versus the dollar touched in overnight trade.

Comments by Philadelphia Federal Reserve President Charles Plosser that the U.S. central bank typically does not involve itself in currency intervention added to selling pressure on the dollar.

"Essentially we had a virtual rate hike today. For all intents and purposes it seems very much as if the ECB will tighten rates next month," said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

"It looks as if the dollar is going to be under a bit of pressure. We have seen a massive turnaround in market positions today, people flipped from being long dollars back to the old position of being long euros."

The euro vaulted to a session high of $1.5601 <EUR=>, recovering from three-week lows of $1.5366 tested after data showed an unexpected fall in German manufacturing orders in April and building activity shrunk again in May.

In late New York trade, the euro was up 1.0 percent at $1.5590, notching its biggest daily gain in more than two months at current prices.

An ECB interest rate hike would enhance the allure of euro-zone assets and the currency, at the expense of the dollar, with the Federal Reserve only expected to start raising U.S. interest rates by the end of the year after an aggressive easing cycle.


The dollar had rallied in recent days after Fed Chairman Ben Bernanke sounded a rare warning that the weaker currency posed a risk to inflation.

Analysts said it now appeared that Bernanke's remarks were intended to cushion the dollar from unexpected events, such as Trichet's blunt rate comments.

"The market is speculating that part of the reason why Mr. Bernanke sounded more hawkish and talked up the dollar was to perhaps give the greenback a bit of a buffer against the expected hawkish comments from Mr. Trichet," said Omer Esiner, forex analyst at Ruesch International in Washington.

"There seems to be some kind of an understanding behind the scenes between the Fed and the ECB, which may have postponed the timing of an interest rate hike in Europe to next month in order to protect the dollar."

Against the yen, the euro jumped 1.7 percent to 165.21 yen <EURJPY=>, posting its largest daily rise in about two and a half months.

It climbed 0.9 percent versus sterling to 79.61 pence <EURGBP=> and leapt 1.2 percent against the Canadian dollar to 1.5866 <EURCAD=>.

Analysts said Bernanke's tough talk on inflation had seen traders wary of aggressively selling the dollar.

"There was an implicit threat that U.S. authorities could take action on the dollar if we were to see a significant slide in the dollar's value," said TD Securities' Osborne.

"So the market might be a bit reluctant to lean too hard on the dollar. If we get an appalling payrolls figure tomorrow it's going to quite tricky for the dollar."

The dollar rose to three-month highs against the yen of 106.42 <JPY=>, bolstered by perceptions that the U.S. economy was in much better shape than many initially thought after claims for jobless benefits posted their biggest drop in six weeks. May's non-farm payrolls report on Friday will be closely watched for a corroboration of that view.

The pound fell to a two-week low against the dollar at $1.9464 <GBP=> after the Halifax UK House Price Index fell more than expected in May. It rebounded to trade around $1.9583, up 0.2 percent.

The Bank of England kept rates unchanged at 5 percent, in line with market expectations. (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Leslie Adler)

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