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Thursday April 6, 2006 - 21:14:30 GMT
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FOREX-Euro declines after rate remarks by ECB's Trichet

FOREX-Euro declines after rate remarks by ECB's Trichet
Thu Apr 6, 2006 4:26 PM ET

(Adds comments, updates prices, changes byline)
By Kevin Plumberg
NEW YORK, April 6 (Reuters) - The euro weakened on Thursday after market expectations for a May euro zone interest rate increase were sharply reduced following comments by the European Central Bank chief, giving respite to the weary dollar.

ECB chief Jean Claude-Trichet said the bank's policy-making body did not share the same view as the market, which prior to Thursday's meeting of the central bank, had fully priced in a quarter-percentage-point rate increase next month.

The euro fell swiftly to an intraday low of $1.2197 before slightly recovering to $1.2225, down 0.6 percent on the day in its largest one-day slide in two weeks. It had earlier risen to a seven-month high of $1.2323.
Against sterling, the euro retreated 0.5 percent to 69.76 pence , after hitting a 15-month high of 70.21 pence on Wednesday.

"The euro fell across the board following Trichet's remark to dispel market expectations of a May rate hike," said Michael Woolfolk, senior currency strategist with Bank of New York.

"While market players will applaud his statement today that 'Clarity and transparency is essential,' the unorthodox approach to correcting market misperceptions undoubtedly caught many players wrong-footed in a market decidedly long euros," Woolfolk said in a note to clients.

U.S. government bond yields rose slightly more on the day than euro zone paper, bringing the yields spread of 10-year Treasuries over Bunds to about 102 basis points compared with 100 basis points on Wednesday.

The ECB earlier held rates as expected at 2.50 percent.
But euro bulls were clearly disappointed by Trichet's seemingly deliberate avoidance of the word "vigilance" in his comments on inflation, the addition of which would likely have been interpreted as a sign of further tightening.

But even though Trichet was fairly upbeat in his other remarks, signaling a rate hike in June is still a possibility, his remark on the May meeting prompted hefty euro selling.

Some traders now suspect that the last 72 hours of euro strength that had pushed it up through key chart levels may have been a false break.

"The crosses led this move up and I think it was a false move," said a senior trader with an asset management firm. "So now we could see $1.1800 (in the euro) still before we see $1.2500."

Trichet's blunt comments on expectations for a May rate increase prompted Morgan Stanley to recommend to its clients to go short on euro/dollar and euro/yen.

"As the more hawkish market expectations get scaled back, we think there is scope for the euro to retrace its recent gains," the bank's currency strategists said in a research note.

Against the yen, the euro was down 0.3 percent at 143.88 yen, after hitting a record high earlier at 144.92 yen.
With the focus squarely on interest-rate differentials after the ECB meeting, the dollar was firmer against other major currencies.

The dollar was last at 117.63 yen , up 0.3 percent, while sterling was virtually flat at $1.7525.

With the March U.S. nonfarm payrolls report coming up on Friday, some traders have suggested that the only thing that will prevent another sharp sell-off in the dollar against the euro will be a blow-out number. The current forecast calls for a gain of 190,000 jobs in March. (Additional reporting by Amanda Cooper)

© Reuters 2006. All Rights Reserved.


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