Sun, Nov 20, 2005 - Page 10 News List

Euro recovers on hint of imminent rate hike


The US dollar ended mixed on Friday while the struggling euro got a lift as European Central Bank (ECB) chief Jean-Claude Trichet gave his strongest hint yet that interest rates in the eurozone would rise soon.

The euro changed hands for US$1.1768 at 10pm GMT from US$1.1748 late on Thursday in New York.

The US dollar firmed to £119.12 from £118.79 on Thursday.

The euro recovered after floundering near two-year lows as Trichet said the ECB's governing council is considering a move to raise rates moderately next month, noting risks to price stability.

"After two and a half years of maintaining historically low interest rates, I consider that the governing council is ready to take a decision on interest rates," Trichet said in a speech at the European Banking Congress.

He added that interest rates would still contribute to sustainable growth and job creation.

Most market participants took his comments as a strong hint that the ECB will raise its key re-financing rate at the Dec. 1 rate-setting meeting. It has kept the benchmark rate unchanged at 2.00 percent since June 2003.

"That was certainly the most explicit Trichet has been and it now looks like a December a rate hike looks very probable," said Neil Mackinnon, chief economist at ECU Group.

Tom Benfer, foreign-exchange vice president at Harris Nesbitt, said Trichet's remarks and mounting expectations for an ECB rate hike next month are unlikely to give the euro long-term support.

He also predicted that although the ECB may well lift rates on Dec. 1, it is unlikely to embark on a long-running program of incremental increases as the Federal Reserve has done.

"There are limitations on how much the ECB can lift rates. The European economies are a bit weak," Benfer said.

The Fed raised its benchmark rate by a quarter-point for the 12th consecutive time earlier this month to 4.0 percent, and indicated that the US economy is on a steady growth track despite the impact of Hurricanes Katrina and Rita.

"The big picture still favors the dollar, though Trichet's comments have provided the euro some temporary support," Mackinnon said.

Before the comments, the single currency was heading down to its lowest level since November 2003 of US$1.1664. Following Trichet's remarks it hit a high of US$1.1796.

Earlier the Bank of Japan (BOJ), as expected, held to its monetary policy by a 7-2 vote. The governor of the bank, Toshihiko Fukui, insisted there was no rift between the government and the central bank on when its easing policy should end.

But analysts from UBS also noted media reports that in Japan, where the core rate of inflation at the retail level only excludes food prices but not energy prices, the government is considering also stripping out energy prices from core CPI.

"If the reports are accurate, then the adjustment to the CPI comes at an extremely convenient time for the government, which has been pressuring the BOJ not to move too quickly in normalizing monetary policy even if CPI turns positive," the bank said.

Elsewhere, the markets remained slightly uneasy about this weekend's visit to China by US President George W. Bush.

The trip has inevitably set the markets talking of another possible revaluation of the Chinese yuan.

Most analysts think an imminent revaluation is unlikely, however, not least because Bush may have more important issues to address, such as ensuring some kind of success at next month's WTO meeting in Hong Kong.

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