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Thursday August 3, 2006 - 10:24:44 GMT
Reuters - www.reuters.com

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FOREX-Euro loses ground ahead of Trichet rate signals

FOREX-Euro loses ground ahead of Trichet rate signals
Thu Aug 3, 2006 6:05am ET166

(Updates price, adds quotes, changes byline)

By David Milliken

LONDON, Aug 3 (Reuters) - The euro retreated from this week's one-month high against the dollar on Thursday as investors awaited signals on future interest rate rises from the European Central Bank after an expected interest rate hike.

The ECB is expected to raise rates to 3 percent in a decision to be announced at 1145 GMT. President Jean-Claude Trichet will hold a news conference at 1230 GMT where some investors see room for a downside risk for the euro.

"To justify the current pricing you have to have a very hawkish Trichet, so if he comes in less hawkish the euro might lose," said Hans-Guenter Redeker, currency strategist at BNP Paribas in London.

Anything less than a repeat of the word "vigilance", which the ECB uses when another rate hike is imminent, would likely prompt a sell-off because some investors were positioned for another rate hike at the ECB's Aug. 31 meeting, Redeker said.

By 0951 GMT, the euro was down 0.3 percent at $1.2750 having hit a one-month high of $1.2835 on Wednesday.

The euro shrugged off a survey showing the region's service sector growth slowed last month after hitting a six-year high in June, and was unmoved by euro zone retail sales, which rose by 1.5 percent year on year, in line with analysts' forecasts.

The dollar was trading at 115.15 yen , up 0.4 percent on the day. The euro was up 0.1 percent at 146.77

A London trader said investors were correcting their positions after going too long on the yen.

"Everyone's reading.... reports that dollar/yen goes down in August so the whole herd of wildebeest have got the same position," he said. "The only compelling logic seems to be that dollar/yen has gone down every August since 1997, which probably means it's not going to happen."

The dollar is awaiting a survey on the U.S. non-manufacturing sector due later and closely-watched jobs data on Friday for clues whether the Federal Reserve will pause from its two-year tightening campaign at its Aug. 8 meeting.

Redeker said there was still more dollar upside potential on Thursday, but that it would be vulnerable to weak U.S. payrolls data on Friday, both for its rate implications and because Japan is a substantial U.S. net asset holder.

PAST PEAK?

The euro zone services sector Purchasing Managers Index fell to 57.9 in July from 60.7 in June. A survey earlier this week showed the euro zone's manufacturing sector growth also slowed from the previous month's six-year peak.

"It reinforces my view that the press conference will not be particularly hawkish," said Audrey Childe-Freeman, economist at CIBC World Markets. "They won't want to commit to anything going forward on a rate hike coming up. We will hear the phrase of 'close monitoring of inflation risks', rather than 'vigilance to inflation'."

Sterling got a small boost after Italy's central bank said it had cut the share of its dollar reserves to 63 percent from 84, raised holdings of sterling to 25 percent from zero in 2004, and trimmed reserves in the yen.

At the end of first half of 2006 Italy's reserves stood at 61.2 billion euros ($79 billion).

Investors are awaiting an interest rate decision by the Bank of England where some economists see a chance of tightening.

The Fed has boosted interest rates 17 times in a row since June 2004, bringing the fed funds rate up to 5.25 percent. Fed fund futures were pricing in about a 40 percent chance that the U.S. central bank will raise rates to 5.50 percent next week. (Additional reporting by Antonina Vorobyova)

© Reuters 2006. All Rights Reserved.

 

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