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Wednesday June 6, 2007 - 20:28:25 GMT
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FOREX NEWS-Euro slides vs yen after Trichet, equity weakness

FOREX-Euro slides vs yen after Trichet, equity weakness
Wed Jun 6, 2007 4:18 PM ET

(Recasts, adds comment, updates prices)

By Vivianne Rodrigues

NEW YORK, June 6 (Reuters) - The euro dropped against the yen and the dollar on Wednesday after the European Central Bank gave no clear indications about the outlook for interest rates beyond 2007, while global equity market weakness helped lift the Japanese currency.

The yen was on track for the largest daily increase against the dollar in nearly two months, with investors exiting risky trades funded by borrowing cheaply in yen after seeing stock markets around the world weaken.

The ECB lifted its benchmark lending rate to 4 percent, but the quarter-percentage-point hike had been well telegraphed and failed to boost the euro, which has been rising along with European interest rates over the last year.

While ECB President Jean-Claude Trichet said liquidity remains ample and inflation risks remain tilted to the upside, he added the ECB does not intend to alter its 2008 inflation forecast.

"Some investors were expecting too much out of the ECB's announcement. They wanted an aggressive indication about further rate hikes, but in the end, the ECB did not offer that," said David Durrant, chief strategist at Julius Baer Investment Management in New York.

The euro fell around 0.35 percent from late Tuesday to 163.47 yen . It had risen to a record high on Tuesday of 164.62, according to electronic platform EBS.

Equity weakness prompted investors to unwind trades financed by borrowing yen at low Japanese interest rates, a strategy known as the carry trade, analysts said.

The Morgan Stanley Capital International gauge of world stock markets <.MSCIWO> fell about 1 percent, the largest single-day decline in a month.

Tim Mazanec, senior currency strategist at Investors Bank & Trust in Boston, said market players probably shouldn't expect liquidity to dry up and global interest rates to start falling just yet.

Investors in interest rate futures have nearly priced out any chance of the Federal Reserve cutting rates this year after data has pointed to surprising strength in the U.S. economy.

Meanwhile, euribor contracts rallied across the 2008 part of the curve after Trichet's remarks, with the implied chances of euro-zone rates hitting 4.5 percent by March falling to around 60 percent, from 80 percent a day ago.

"We are getting toward the point where (interest rates) are neutral, so there's no additional impetus there for the euro to gain on the back on that," said Shaun Osborne, senior currency strategist at TD Securities in Toronto.

The euro slipped below $1.3500 to a session low of $1.3486 , down 0.2 percent from late Tuesday and nearly two cents from a record high above $1.3680 hit in April. It last traded around $1.3506.

The euro hit a one-month low at 1.6423 francs .

"It seems the ECB is going to hold off for a while, and the euro will have a tough time getting through $1.36 again soon," said David Hilgeman, an analyst at optionsXpress in Chicago.

At 4 percent, euro-zone interest rates are at their highest in nearly six years and are double what they were 18 months ago, when the ECB began its current monetary tightening cycle.

The yen also gained ground on the dollar, which fell 0.3 percent to 121.05 yen .

The Australian dollar surged earlier to a 17-year peak against the U.S. currency after higher-than-expected first-quarter growth data suggested Australian interest rates, now at 6.25 percent, could be headed higher.

The New Zealand dollar also hit its strongest level against the greenback since being floated in 1985. New Zealand's central bank will meet early on Thursday and the majority of analysts' polled by Reuters expect it to keep its benchmark lending rate steady. (Additional reporting by Steven C. Johnson and Kevin Plumberg)

© 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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