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Forex - Euro surges after ECB's Trichet hints at near-term interest rate hike

Thu, Jun 5 2008, 15:49 GMT
http://www.afxnews.com

LONDON (Thomson Financial) - The euro surged against the dollar after European Central Bank president Jean-Claude Trichet suggested interest rates will need to rise soon to counteract soaring inflationary pressures.

Trichet said the ECB is in a state of "heightened alertness" on inflation risks in the euro zone and would not rule out a rate hike as early as July.

"Unless euro zone inflation and money supply data come down significantly the ECB will definitely move in August, if not in July," said Neil Mellor at the Bank of New York Mellon.

"Markets have been busying themselves to price that in," he added.

Trichet's comments came after the ECB's expected decision to leave interest rates on hold at 4.00 percent.

The news caused the dollar to reverse its recent sharp gains, taking the euro back well above $1.55 to an intraday high of $1.5563.

The U.S. currency earlier Thursday hit a 22-day high against the euro as it continued to benefit from a warning earlier in the week from U.S. Federal Reserve president Ben Bernanke on the consequences of a weak dollar for inflation.

Mellor noted, however, that unless the Federal Reserve backs talk like this up with action then the dollar's reaction will only ever be limited.

"The Fed is not yet willing to commit to anything and euro/dollar is likely to remain bid, moving up towards the $1.56/$1.57 level," he said.

Meanwhile, the euro also surged against the pound, reaching an eight-day high of 0.7958.

The Bank of England on Thursday left its benchmark interest rate steady at 5.00 percent as rate-setters remain concerned about soaring inflationary pressures.

At the same time, however, there is growing evidence that the credit crunch is causing the economy to slow sharply, driven by a marked deterioration in the housing market.

Figures out earlier from HBOS unit Halifax's housing market survey showed a massive 2.4 percent monthly fall in house prices during May, far worse than forecasts for a much smaller 1.0 percent fall.

"Sterling is not looking good. It is fighting with the dollar as one of the two main contenders in the 'ugly' competition," Mellor said.

London 1524 GMT London 1201 GMT

U.S. dollar

yen 106.01 down from 106.07

Swiss franc 1.0401 down from 1.0481

Euro

U.S. dollar 1.5550 up from 1.5405

pound 0.7953 up from 0.7897

yen 164.88 up from 163.46

Swiss franc 1.6176 up from 1.6155

Pound

U.S. dollar 1.9548 up from 1.9507

yen 207.27 up from 206.97

Swiss franc 2.0334 down from 2.0451

Australian dollar

U.S. dollar 0.9562 up from 0.9536

pound 0.4891 up from 0.4887

yen 101.34 up from 101.17

jessica.mortimer@thomsonreuters.com

jkm/rw

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