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Wednesday September 6, 2006 - 11:07:18 GMT
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FOREX-Upbeat ECB comments support euro; yen consolidates

FOREX-Upbeat ECB comments support euro; yen consolidates
Wed Sep 6, 2006 6:43am ET167

(Updates prices, adds fresh quotes, changes byline)

By Toni Vorobyova

LONDON, Sept 6 (Reuters) - The euro hit a five-month peak versus the Swiss franc and held firm against the dollar on Wednesday, after euro zone policymakers signalled rates may rise more than forecast if growth or inflationary pressures pick up.

The yen retreated from the previous session's 2-week highs against the dollar and euro, consolidating gains made after strong Japanese capital spending data prompted an unwinding of extreme short positions in the Japanese currency.

Shifting interest rate expectations for Japan are now giving investors jitters about holding carry trades, involving borrowing the low-yielding yen to buy higher-yielding assets, analysts said.

Rate expectations in the euro zone were given a boost after European Central Bank Governing Council member Axel Weber said interest rates might have to rise more than currently foreseen if upward risks to inflation come to pass.

Fellow council member Erkki Liikanen also highlighted the importance of monitoring inflation risks, adding that rates, now at 3 percent, are still historically low in nominal and real terms.

"They underlined the pretty hawkish comments we had from (ECB President Jean-Claude) Trichet at the last meeting, and gave the euro a bit of a lift," said Antje Praefcke, currency strategist at Commerzbank Corporates & Markets in Frankfurt. She added that some analysts may be prompted to revise up their expectations for ECB rate hikes in 2007 if other bank officials match their colleagues' upbeat tone.

The ECB's Mario Draghi is due to speak at 1615 GMT. Continued...

For now the consensus is for the ECB to hike to 3.25 percent in October and then once more by year end, before pausing.

By 1004 GMT, the euro was steady on the day at $1.2826 , and hit a 5-month peak against the Swiss franc at 1.5838 francs .

The European Commission raised its euro zone GDP growth forecast to 2.5 percent for this year from 2.1 percent.

The euro also gained around a third of a percent against sterling and the yen .

The yen eased 0.25 percent from 116.38 yen per dollar , off a two-week low around 115.55 yen hit on Tuesday.

Solid Japanese capital spending figures on Monday triggered an unwinding of huge short yen positions put on since late August, after the release of weaker than expected Japanese consumer price data.

"There is a lot of caution on positioning, because the market has built up quite chunky (carry trade) positions," said Paul Mackel, currency strategist at HSBC.


The Australian dollar fell after data showed that Australia's second-quarter gross domestic product grew a smaller-than-expected 1.9 percent from a year ago -- its weakest pace in three years.

The Reserve Bank of Australia left interest rates unchanged at 6.0 percent on Wednesday, as expected, though many investors say rates will have to rise again.

"Recent, timelier data including building approvals and business surveys suggest that the intensity of demand could be speeding up. Thus, today's figure may not be sufficient to dissuade the RBA's hawkish stance," Citigroup said in a note.

The Canadian dollar was steady against the U.S. dollar ahead of a Canadian rate decision at 1300 GMT, forecast to result in steady rates of 4.25 percent.

Wednesday also sees the release of U.S. ISM non-manufacturing index for August at 1400 GMT and the Fed's Beige Book report on economic activity at 1800 GMT.

Monday's upbeat capital spending data has kept alive the possibility that the Bank of Japan could boost interest rates again later in the year after lifting them for the first time in six years in July, to 0.25 percent.

Markets are also cautious ahead of a Group of Seven finance ministers meeting in Singapore later this month, where discussions may touch upon the issue of global imbalances -- a potentially negative topic for the dollar.

© Reuters 2006. All Rights Reserved.


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