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Friday June 30, 2006 - 10:15:32 GMT
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FOREX-Euro rallies as ECB hikes eyed, dlr down post-Fed

FOREX-Euro rallies as ECB hikes eyed, dlr down post-Fed
Fri Jun 30, 2006 5:54am ET171
(Releads, changes byline)

By Toni Vorobyova

LONDON, June 30 (Reuters) - The euro hit a three-week high against the dollar on Friday, as investors focused on prospects for faster euro zone rate hikes after the U.S. Federal Reserve signalled a pause in its long monetary tightening campaign.

As widely anticipated, the Fed raised interest rates for the 17th successive time to 5.25 percent on Thursday, but stirred financial markets by watering down its warnings about the need to tighten policy in the months ahead.

That, along with growing expectations that the European Central Bank could raise rates aggressively was holding down the greenback and boosting the single currency.

Euro zone inflation stuck at an annual 2.5 percent in June, beating forecasts for a fall to 2.4 percent, data showed on Friday. The European Commission's business climate indicator jumped to 1.41 this month, its highest in nearly six years.

This follows a run of strong data from the 12-nation block in recent days. ECB policymakers have also stepped up their rhetoric this week, warning of inflationary pressures.

"We had good figures out of the euro zone and that was pretty positive for the euro and now we have to wait and see what will happen next week at the ECB. We had some expectations going up (for a July hike) but we do not expect them to raise rates that early," said Antje Praefcke, currency strategist at Commerzbank Corporates & Markets in Frankurt.

"The dollar lost ground globally since the (Fed) statement was less hawkish than expected by the market," she added.

By 0936 GMT, the euro was up 0.4 percent against the dollar at $1.2713, just off a three-week high of $1.2744 hit earlier in the session.

The dollar also hit a three-week low against an index of currencies <=USD> at 85.47.


Building expectations that the Fed could raise rates to 5.5 percent in August had driven the dollar to two-month highs against major currencies in the past week. But it reversed gains on Thursday after the Fed's statement failed to support such a view.

The euro, meanwhile, rallied to two month highs against the Swiss franc at 1.5687 francs and against sterling at 69.46 pence .

Investment bank JP Morgan on Friday said it had changed its forecast for euro zone interest rates, and now expects the European Central Bank to raise interest rates on July 6.

The bank then sees rates in the euro zone rising to 4 percent by early 2007 from 2.75 percent now.

"Given heightening speculation on accelerated ECB hikes, upside surprises to economic releases will be apt to strengthen euro support, especially in view of the repricing of Fed expectations," JP Morgan said in a note to clients.

For more clues about whether the central bank will further tighten credit, traders are looking to the U.S. PCE index, the inflation gauge most closely watched by Fed policymakers.

The core PCE for May, due at 1230 GMT, is expected to show a rise of 0.2 percent from a month earlier. That is likely to keep the year-on-year pace steady at 2.1 percent, at the upper end of the Fed's comfort zone.


Against the yen, the dollar hit a one-week low of 114.47 yen on Friday after sliding more than 1 percent the previous day. The yen also managed to resists the euro's rally, staying steady at 145.72 per unit of the single currency .

Japanese core consumer prices rose firmly in May, while the jobless rate fell to an eight-year low, reinforcing expectations that the Bank of Japan will raise rates as soon as next month.

All eyes are now on the BOJ's quarterly tankan index of business sentiment, due for release on Monday. The index is forecast to rise as well on upbeat corporate profits and to show plans for solid capital spending in the months ahead.

If the tankan holds up despite the sharp drop in Tokyo shares during the June survey period, the report is expected to pave the way for the BOJ to raise rates at its July 13-14 meeting, probably to 0.25 percent.

© Reuters 2006. All Rights Reserved.


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