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Wednesday April 5, 2006 - 11:11:43 GMT
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FOREX-Looming ECB meeting keeps euro on firm footing

FOREX-Looming ECB meeting keeps euro on firm footing
Wed Apr 5, 2006 6:48 AM ET169

By Ana Nicolaci da Costa

LONDON, April 5 (Reuters) - The euro hit a fresh two-month high against the dollar and neared record highs versus the yen on Wednesday one day before an European Central Bank meeting where officials are expected to signal further credit tightening to come.

In the euro zone, March services PMI came in slightly below forecast at 58.2, but there were pockets of strength in the individual countries' data and the numbers did little to shake expectations for an ECB rate hike in May and beyond.

Meanwhile, comments by Federal Reserve officials overnight fuelled speculation that the U.S. central bank's near two-year long monetary tightening could be approaching its end.

"Going into this week's meeting and more importantly the press conference, we believe the euro is going to remain very well supported and that Trichet will be preparing the market for a May rate hike," said Ian Stannard, currency strategist at BNP Paribas.

"The Fed speak we saw yesterday and overnight has been interpreted as being on the dovish side and we would agree with that interpretation as well."

He said a peak in U.S. rates was fast approaching and that was going to put the dollar under further pressure.

By 1024 GMT, the euro was at $1.2254 , steady on the day, having hit a two-month peak around $1.2285 earlier.

The euro could well gain momentum to test $1.2300, with the previous resistance of $1.22 now seen as support, traders said.

The single currency also hit a 15-month high versus sterling at 70.05 pence as weak UK services data reinforced views of a sluggish UK economy.


Against the yen, the euro was little changed on the day at 144.00 yen , having earlier come close to the previous day's record high of 144.19 yen.

The dollar was steady on the day versus the yen at 117.56 but recovered from earlier one-week lows of 116.67 yen.

"The yen is fascinating at the moment. JGB yield curves are steepening and given inflation, real yields will fall in Japan. That will give incentives for private-sector investors to invest in overseas assets," said Steven Pearson, chief currency strategist at HBOS Treasury Services.

The dollar also hit a two-month low against the Swiss franc on Wednesday.

The Icelandic crown hit a 2-1/4 year low versus the euro on further concerns about the state of the economy.

Next up, the Institute for Supply Management's March reading for the U.S. service sector will come into focus as investors search for clues about the future course of Fed monetary policy. Economists forecast the index, due at 1400 GMT, to fall to 59.0 from 60.1 in February.


Markets expect the ECB to keep overnight rates unchanged at 2.5 percent at its policy meeting on Thursday but lift them in May and possibly take them as high as 3.5 percent by year-end.

Traders said the market was eyeing comments that ECB chief Jean-Claude Trichet is slated to make after Thursday's meeting for a clear signal of how much credit tightening is in store.

The dollar was also pressured after Kansas City Federal Reserve Bank President Thomas Hoenig said late on Tuesday that the central bank is very close to where it needs to be on policy after having raised rates 15 straight times to 4.75 percent.

Diverging rate outlooks, with the Fed seen reaching the end of its credit tightening campaign soon and the ECB poised to raise rates in the months ahead, wiped more than one percent off the U.S. currency on Tuesday.

Speculation about central banks diversifying their reserves out of the dollar also helped to support the euro in Asian trade overnight.

Reports from China and the Middle East on central banks switching some of their reserves out of the U.S. currency rattled investors on Tuesday and added to the dollar's woes.

China's yuan rose to 8.0075 per dollar , the highest since Beijing revalued the currency last July.

Dealers said the rise was partly due to political reasons, as well as market forces, ahead of Chinese President Hu Jintao's visit to the United States in April.

The United States has been putting pressure on Beijing to allow the yuan to appreciate more quickly to reflect its true value better.

© Reuters 2006. All Rights Reserved.


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