Wednesday May 16, 2007 - 10:20:59 GMT
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FOREX NEWS-Euro hits record highs vs yen on rate view
FOREX-Euro hits record highs vs yen on rate view
Wed May 16, 2007 5:04 AM ET
By Simon Falush
LONDON, May 16 (Reuters) - The euro hit a fresh high versus the yen on Wednesday supported by expectations that euro zone interest rates are set to rise further following robust first-quarter growth the previous session.
The dollar hit a one-week low against the euro after a report on Tuesday suggesting U.S. inflation was well-contained, which backed the view that the Federal Reserve could cut interest rates this year.
The euro got a boost as market expectations for higher interest rates firmed in the euro zone after data showing the euro zone economy grew an above-forecast 3.1 percent in the first quarter from the same period last year.
"There is a focus on interest rate differentials and this has supported the euro... as investors see prospects for rising rates." said Nick Parsons, head of markets strategy at nabCapital.
At 0829 GMT the euro was trading at 163.69 versus the yen, just short of an all-time high set earlier in the session .
The euro was also trading just short of Tuesday's all-time high versus the low-yielding Swiss franc as investors' risk appetite remained robust and they looked to higher-yielding assets for returns.
The dollar was broadly steady versus the euro at $1.3598 and was a touch firmer versus the yen at 120.35 , below a three-month high of 120.58 yen struck the previous session.
The yen stayed on the backfoot against major currencies despite mounting expectations for the Bank of Japan to lift rates to 0.75 percent in the third quarter from the current 0.5 percent, with the yen's yield disadvantage seen staying large.
Further clues on monetary policy outlook could come from Japanese economic growth data for the first quarter on Thursday and a news conference by BOJ Governor Toshihiko Fukui after a policy board meeting ending the same day.
STICK TO RISKY POSITIONS
U.S. data on Tuesday showed consumer prices rising less than expected in April, suggesting that inflationary pressure may be easing. The numbers boosted the case for a growth-boosting interest rate hike, hurting the dollar but supporting U.S. equity markets.
Analysts said cooling inflation supports the global stock market, encouraging investors to stick to risky positions such as carry trades, in which low-yielding currencies such as the yen are borrowed to fund investments in higher-yielding assets.
Investors are looking to U.S. housing starts, building permits and industrial production data for April at 1230 GMT for further direction in the dollar's exchange rate.
"Traders are clearly acting in a highly data-dependent manner just now so with U.S. housing starts and building permits due for release, signs of an upturn in the housing market could result in some near-term dollar support," CMC Markets said in a research note.
Wednesday also features speeches from several Federal Reserve policy makers as well as from ECB Governing Council member Axel Weber.
In contrast to the Fed, the European Central Bank is expected to lift rates to 4 percent in June and probably hike again by year-end.
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