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Friday April 20, 2007 - 10:09:42 GMT
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FOREX NEWS-Euro closes in on record peak vs dollar

FOREX-Euro closes in on record peak vs dollar
Fri Apr 20, 2007 6:03 AM ET

(Updates price, adds quotes, changes byline)

By Toni Vorobyova

LONDON, April 20 (Reuters) - The euro hit a two-year high against the dollar on Friday, coming within half a cent of a lifetime peak as investors compared prospects for rate hikes in the euro zone with those for rate cuts in the United States.

Although euro zone interest rates are below those in the U.S., the region's robust growth and inflation pressures wil probably prompt the European Central Bank to raise rates again in June, a view reinforced by hawkish comments from Governing Council member Axel Weber.

In contrast, the U.S. Federal Reserve is widely expected to cut rates at least once this year, from 5.5 percent.

The lack of opposition from policymakers to a strong euro this time, unlike in 2004, has also contributed. Eurogroup chairman Jean-Claude Juncker and other finance ministers said on Friday the euro's strength was no reason to panic.

"There is little political complaints (about euro strength) -- signalling admittance this is generic dollar weakness," said Adrian Hughes.

"Currency markets know that high inflation high and low activity are not very good for the U.S. dollar. The overall tone of the market is that eventually the Fed will cut interest rates."

The euro rose as high as $1.3637 , approaching the record high of $1.3670 set in December 2004, before trimming gains to stand at $1.3611 at 0950 GMT. It was up 0.2 percent at 161.55 yen , having hit a record peak of 162.42 this week.

The dollar was up slightly on the day at 118.70 yen .

With official interest rates at just 0.5 percent, and seen rising only very gradually, the yen is a favourite funding currency for carry trade investments in higher return units.

The ECB is set to raise interest rates to 4 percent in June with the risk of another move to 4.25 percent later this year.

Weber said in a newspaper interview inflation risks exist in the medium term and the ECB must act against them.

ECB executive board member Jose Manuel Gonzalez-Paramo said late on Thursday that ECB policy remained accommodative, adding that the euro's strength was not a cause for concern.

Euro zone central bankers and finance ministers, in Berlin for a two-day informal meeting, sounded relatively unconcerned about the euro's exchange rate although Governing Council member Vitor Constancio said the ECB is watching euro strength closely.

Germany's BGA exporters association said it expects the euro to rise to $1.40 in coming months, adding that German exporters can live with the strong currency.


In recent weeks, the performance of equity markets has had a great influence in currency markets as it acts as a barometer for risk appetite -- a key ingredient for carry trades.

Asian and European shares tumbled on Thursday as concerns grew China might raise interest rates to cool down the economy.

A Reuters poll of economists showed China looks set to raise interest rates again by end-June and perhaps as soon as Friday.

But stock exchanges in Asia and Europe rebounded on Friday and U.S. stock futures pointed to a firmer start on Wall Street.

UBS said its FX Risk Index moves further into risk-seeking territory, at -0.48 from -0.41 on Wednesday.

Later in the day, investors will tune into comments from U.S. Treasury Secretary Henry Paulson as he is due to speak on common issues between the United States and China. Federal Reserve Board Governor Frederic Mishkin is due to speak.

"We are almost certain to hear Paulson repeat many of the things he has said in the past, such as the need for more flexibility in the yuan," Bear Stearns said in a research note.

"Paulson might play the `domestic' card again, which means arguing that it is in China's own best interests to give the currency more freedom, as this will ease overheating strains."

(Additional reporting by Natsuko Waki)

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


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