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Tuesday May 2, 2006 - 10:48:25 GMT
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FOREX-Euro rallies on firm data, overshadows Bernanke

FOREX-Euro rallies on firm data, overshadows Bernanke
Tue May 2, 2006 6:20am ET11

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By Veronica Brown

LONDON, May 2 (Reuters) - The euro rallied against the dollar on Tuesday, with strong European data offsetting earlier dollar gains made after a report that the Federal Reserve chief said markets had misread his congressional testimony last week.

The single currency came within half a cent of Monday's one-year high as euro zone manufacturing growth came in at its highest since September 2000.

Strong manufacturing figures for the UK also lifted sterling to a one-month peak against the euro, while the Canadian dollar ran to its highest in almost 30 years against the greenback amid strong oil prices.

CNBC television reported late on Monday that Fed Chairman Ben Bernanke told one of its reporters the central bank was still aggressive on inflation and he was concerned that people would see him as dovish.

Coupled with favourable U.S. data on factory growth and inflation, the report triggered a wave of short-covering in the dollar, which had come under renewed pressure after Bernanke said last week that the Fed may pause hiking rates at some point in the future.

Analysts said however that essentially Bernanke had not made a spectacular departure from previous comments on policy.

"In fairness, if you look at what Bernanke said -- it's not all that outlandish," Bank of New York currency strategist Neil Mellor said.

"The (Fed) minutes conveyed a relatively flexible stance with the understanding that rates were probably going to peak at the next meeting. The big issue is that he clarified this to a member of the press. In terms of market information..., I don't think there's all that much to go on," he added.

By 1010 GMT, the euro was up almost half a percent on the day against the dollar at $1.2654, having hit a one-year high of $1.2690 on Monday. Against the yen it was 0.6 percent higher at 143.65 yen.

The dollar was up 0.1 percent at 113.53 yen after falling to 112.32 on Monday, but the greenback fell to its lowest in at least 28 years against the Canadian dollar at C$1.1070.

Sterling touched a one-month high against the single currency at 68.79 pence after British manufacturing PMI figures came in stronger than expected.


The euro zone's manufacturing purchasing managers' index rose to 56.7 in April. Recent strong data from the euro zone is raising expectations for further interest rate rises from the European Central Bank, supporting the euro.

The ECB is expected to leave interest rates at 2.5 percent on Thursday but analysts think the bank will signal the need for future increases to counter inflation. "This week you won't get a rate hike from (ECB President Jean-Claude) Trichet but he will prepare the market for a move in June. Euro zone data have been good, inflation is punchier than expected... this easily makes the case for further rate rises," Calyon currency strategist Daragh Maher said.


Investors are waiting for Bernanke to speak again in Washington on Wednesday for more clarification on when and where U.S. interest rates are likely to peak.

"I think they (Fed) might be looking to make the market less certain whether the rate hikes are coming. He (Bernanke) created that doubt to cause a bigger reaction," said Neil Parker, market strategist at RBS Financial Markets.

The Fed's repeated rate increases helped fire a rally in the dollar in 2005. But so far this year the dollar has fallen about 6 percent against the euro and 3.5 percent versus the yen. But many dealers still expect the dollar to be held back by lingering concerns about the U.S. trade deficit.

Last month the Group of Seven called for China and other emerging countries with big trade surpluses to let their currencies strengthen, triggering a broad dollar sell-off.

The perception that the world needs a weaker dollar to reduce global trade imbalances was a key factor behind the dollar's three-year fall to the end of 2004.


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