Tuesday July 4, 2006 - 10:11:22 GMT
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Reuters - www.reuters.com
FOREX - Euro hits 4-week high vs dollar on ECB rate view
LONDON, July 4 (Reuters) - The euro hit a four-week high against the dollar on Tuesday as a recent run of strong euro zone data raised expectations that the European Central Bank could signal a faster pace of interest rate increases.
The yen remained near the previous day's record low against the euro as expectations grow that the Bank of Japan is unlikely to raise interest rates aggressively this year, even though investors widely expect an increase next week.
A survey on Monday showed the euro zone's manufacturing sector expanded in June at its fastest pace in six years, while comparable data for the United States showed slowing growth in the same month.
"Since yesterday the euro is relatively well bid across all the currencies. People are positioning for a hawkish ECB on Thursday," said Adarsh Sinha, currency strategist at Barclays Capital.
"We've seen the data coming in on the strong side, ECB members being hawkish and talking about the possibility of an August rate hike."
The euro had hit the four-week high of $1.2823 before trimming gains to $1.2805 by 0740 GMT. Against the yen it was broadly steady on the day at 146.74 , having hit the record high of 147.04 on Monday.
The dollar was steady at 114.49 yen.
"A July (BOJ) rate hike is completely priced in. Even though they go in July I don't think they will pick up the pace of tightening," Sinha said. Dealers said that trade was thin and market players hesitated to take aggressive positions because U.S. financial markets are closed on Tuesday for the Independence Day holiday.
The euro zone producer price index for May is due later.
G3 RATE OUTLOOK
The ECB is seen leaving interest rates on hold at its policy meeting this week but many in the market are betting on a rate rise in August, following the bank's hike to 2.75 percent last month.
The Fed followed its 17th rate increase in as many policy meetings last week with a statement saying slower economic growth could help contain inflationary pressures, which many investors took as a sign the bank might pause on its tightening cycle.
"The Fed seems to be implying there will be no ... further rate hike, while Japan and other countries keep raising interest rates. This is dollar negative," said Masafumi Yamamoto, currency strategist at Nikko Citigroup.
In Japan, the government has sent mixed messages about whether it approves of a BOJ move so soon.
Top government spokesman Shinzo Abe said he wanted to the BOJ to continue supporting the economy by keeping zero interest rates, adding that Prime Minister Junichiro Koizumi also agrees on the need for zero rates.
Economics Minister Kaoru Yosano said the necessary conditions for the central bank to bump up rates are falling into place, while Finance Minister Sadakazu Tanigaki said that rates should stay at zero to support the economy.
There were still simmering concerns in the market about the fate of BOJ Governor Toshihiko Fukui in a scandal over his personal investment in a fund run by a manager who was recently charged on suspicion of insider trading.
Around 70 percent of people in a poll published by Japan's Sankei Shimbun newspaper on Tuesday said that Fukui should step down, though most analysts don't expect such a move to affect the timing of a rate rise.
Â© Reuters 2006. All Rights Reserved
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