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Monday June 26, 2006 - 20:42:37 GMT
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FOREX-Euro strengthens on ECB rate talk

FOREX-Euro strengthens on ECB rate talk
Mon Jun 26, 2006 4:28pm ET12

(Updates prices, adds comment)

By Steven C. Johnson

NEW YORK, June 26 (Reuters) - Tough talk on inflation from European Central Bank officials on Monday and revived concerns that countries may switch some dollar reserves into euros pushed the dollar lower against the euro zone single currency.

The dollar has rallied more than 2 percent so far in June, so broad weakness on Monday may have also been due to position-squaring ahead of the Federal Reserve policy meeting on June 28-29, dealers said.

"We're getting the other side of the coin now, and against that backdrop, the market is latching on to these ECB comments about the need to keep hiking rates," said Matthew Strauss, currency strategist at RBC Capital Markets in Toronto.

The euro carved out a record high against the yen, climbing above the previous peak of 146.28 set last week to 146.39 .

Against the dollar, the euro was at $1.2575 , just off a session high above 1.2600.

The price action reversed last week's dollar rally, mounted when markets were growing uncertain about the strength of the euro zone economy and having doubts about when the Bank of Japan would end its zero-interest-rate policy.

Sentiment on the euro remained strong after ECB governing council member Nout Wellink said euro zone inflation risks have moved higher and growth may be better than expected. For details see [ID:nFAT002683].

Yves Mersch, another ECB governing council member, told Bloomberg news wire the central bank has not ruled out raising interest rates by a half percentage point instead of the habitual quarter point, or indeed raising rates after its Aug. 3 teleconference rather than waiting for its next policy meeting on Aug. 31.

Markets are primed for the ECB to raise interest rates by a quarter point at its Aug. 31 meeting, but some investors have speculated about an early August hike.


The Fed is widely expected to lift overnight U.S. lending rates this week and again in August by a quarter percentage point for the 17th and 18th consecutive time, to 5.50 percent, according to the interest rate futures market.

The futures market reflects expectations U.S. rates will remain more than 200 basis points over euro zone rates by the end of the year.

"The market is looking for cover heading into the (Fed policy meeting) and after the recent bout of liquidation buying, the dollar has to prove it has legs for the currency to move higher in a sustained way," said Jay Meisler, principal of, an online forum for traders and investors.

"This is why we are seeing the euro benefit on its crosses as the market looks to hedge itself into the decision," he said.

The euro also got a boost after the central bank governor of the United Arab Emirates said the bank plans to convert 10 percent of its $23 billion currency reserves into euros, although a timetable has not been put in place.

"It doesn't take much of an effort to sell $2.3 billion (10 percent of $23 billion UAE reserves) for the euro, especially in the liquid Northern Hemisphere time zone, and especially over a few days," said Michael Jansen, currency strategist at National Australia Bank in New York.
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© Reuters 2006. All Rights Reserved.


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