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Tuesday January 16, 2007 - 11:34:19 GMT
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FOREX-Strong ZEW supports euro, UK CPI knocks sterling

FOREX-Strong ZEW supports euro, UK CPI knocks sterling
Tue Jan 16, 2007 6:20am ET144

(Updates with ZEW, UK CPI, adds quotes, changes dateline)

By Toni Vorobyova

LONDON, Jan 16 (Reuters) - The euro rose against a broadly weaker dollar on Tuesday, supported by a robust survey of German business sentiment and by the unwinding of positions after the greenback's rally the previous week.

Expectations for near-term U.S. interest rate cuts have been scaled back sharply in the past couple of weeks in the wake of stronger than expected economic data. But the dollar's rally has run out of steam in the absence of any fresh news and with the United States shut for a public holiday on Monday.

Sterling also faced a reversal of fortunes, retreating from recent 2-1/2 year peaks versus the euro after UK consumer price inflation came in at 3 percent year-on-year in December -- above consensus but less than some had expected given the Bank of England's surprise interest rate hike last week. "It's a buy the rumour sell the fact story, where there clearly had been a risk that it could have been a truly awful number, given that it was no doubt one of the factors behind the Monetary Policy Committee hiking unexpectedly last week," said Adam Cole, senior currency strategist at RBC Capital Markets.

"The move down in euro/dollar was probably a shake out of positions ... What we are seeing now is those positions gradually getting rebuilt and also the market has now taken out much of the Fed easing so there isn't an awful lot of upside for the dollar on U.S. rate expectations," he added.

In the euro zone, forecasts are for another interest rate hike from the current 3.5 percent in March. The German ZEW index showed that investor sentiment in the bloc's biggest economy improved more than expected in January.

The current conditions index came in at 70.6, above the expected 62.0, while the economic expectations indicator was -3.6, above the expected -10.

By 1040 GMT the euro was up 0.3 percent at $1.2973 , more than a cent above last week's 1-1/2 month lows. Against the yen the single currency was up 0.1 percent at 156.07 , and it was also a quarter of a percent firmer versus sterling at 65.85 pence .

The dollar edged lower versus the Canadian currency ahead of a Bank of Canada rate decision at 1400 GMT. The Bank is widely expected to hold rates at 4.25 percent and is unlikely to signal that rate cuts are imminent.

Sterling was steady against the dollar at $1.9647 , while the dollar was also flat at 120.34 yen , some 40 ticks below last week's 13-month highs.


The yen remained under pressure despite market expectations for a Bank of Japan interest rate rise later this week.

"A rate hike would not lead to significant yen upside given that the market has priced in a large part of the move. The risks are more so of yen downside, if the BOJ surprise us and the rest of the market by either delaying the vote or simply deciding not to vote," BNP Paribas said in a client note.

Analysts said that a rate rise to 0.5 percent was unlikely to give the yen much of a lift as it would still be a low-yielding currency compared with the euro, the dollar or sterling.

A wide array of market players have borrowed the low-yielding yen and used the funds to purchase higher-yielding currencies in the carry trade, helping push sterling to an eight-year high against the Japanese currency .

Of 35 traders and analysts in Tokyo's foreign exchange and bond markets that took part in a Reuters survey on Monday, 29 said they expected the BOJ to raise interest rates this week. The six others expected a rate rise between February and April.

After the expected increase to 0.5 percent, only two predicted that the BOJ would raise rates again in the April-June quarter, while 21 expected a further hike in July-September and 10 in October-December.

© Reuters 2007. All Rights Reserved.


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