Monday February 7, 2011 - 22:53:56 GMT
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FOREX NEWS - Euro flat vs dollar as ECB rate hike hopes diminish
Mon Feb 7, 2011 4:43pm EST
* Euro roughly flat, stems losses on weak German data
* U.S. yields rise, support dollar
* Euro speculative positioning more neutral (Recasts, updates prices, adds quotes)
By Julie Haviv
NEW YORK, Feb 7 (Reuters) - The euro ended little changed against the U.S. dollar on Monday after reaching a two-week low, but near-term gains will likely be limited as weak German industrial data fuel doubts of interest rates rising in the euro zone.
European Central Bank President Jean-Claude Trichet doused expectations of an imminent rate increase last week, saying inflation would remain contained. The German data bolstered that view, prompting investors to book more profits after the single currency's new year rally. For details, see [ID:nLDE7160ZR]
Analysts said the euro's near-term direction would hinge on the progress of discussions on a euro zone debt rescue fund.
"Last week's less-hawkish comments from ECB President Trichet remain key to the recent turnaround in the euro and the currency appears vulnerable to further downside, a factor that could contribute to a broadly stronger U.S. dollar in the coming days," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.
"On a week that is relatively light for economic data, markets will be focusing in central bank announcements in the U.K. and South Korea, as well as Fed Chairman Bernanke's testimony to the House Budget Committee," he said.
Bernanke's testimony is scheduled for Wednesday.
The dollar weakened against the euro through most of January on expectations rising inflation would prompt the ECB to raise interest rates much earlier than the Fed.
"Those expectations were far too speculative and thus why we have seen a sharp turnaround this past week," said Jessica Hoversen, foreign exchange and fixed income analyst at MF Global in Chicago.
She said profit-taking and a disappointing read of German industrial orders helped weaken the euro versus the dollar.
After underperforming the dollar for three straight days, the euro EUR=EBS was nearly unchanged at $1.3586, or 0.01 percent higher, in late afternoon New York trading. It earlier hit a low of $1.3508 on electronic trading platform EBS.
The euro had hit a two-week low, falling below the current 100-day simple moving average, a key support, at around $1.3532. Investors focused on $1.3500, followed by $1.3480, the 38.2 percent retracement of the January-to-February rally.
"Meanwhile, we expect U.S. rates, both on the short- and long-end of the yield curve, to continue to head higher, which bodes well for the dollar," said Hoversen.
Against the yen, the dollar added 0.2 percent at 82.30 yen JPY= after rising more than 1 yen from a one-month low of 81.10 hit just after the Friday jobs data. Resistance is at 82.56, the top of the Ichimoku cloud, a closely watched technical indicator.
Market participants are starting to factor in higher U.S. interest rates for 2012, particularly after Friday's jobs report, which showed a decline in the unemployment rate to 9.0 percent last month. That led to a rise in benchmark U.S. yields and a widening of the spread against 10-year German bunds in favor of U.S. Treasuries, which added to the dollar's appeal.
Worries the Fed is clinging to a near-zero interest rate policy for too long as inflation and the economy accelerate sent U.S. Treasury prices lower on Monday for a sixth straight session. Yields rose to levels reached last spring.
In the futures market, traders are pricing in an 88 percent chance FFF2 the Fed may raise its short-term interest rate by year-end. This was up from roughly a 37 percent chance a week ago.
The 25 delta risk reversals, a measure of risk sentiment, on front-end euro/dollar EUR1MRR=GFI are still showing a bias toward puts, or expectations for a currency decline, but the puts have become less extreme.
In the latest week, currency speculators raised bets on the euro to the highest level since late October after weeks of significant shorting, according to the latest data from the Commodity Futures Trading Commission. (Additional Reporting by Gertrude Chavez-Dreyfuss; Editing by Dan Grebler)
© Thomson Reuters 2010. All rights reserved.
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