Forex - Euro up sharply as data point to higher euro zone interest rates

Forex - Euro up sharply as data point to higher euro zone interest rates

	Published : Fri, 23 Feb 2007 17:07 By : Agencies Print this Story

LONDON (AFX) - The euro was sharply higher against the dollar as strong data this week point to higher interest rates in the euro zone, with most in the market expecting rates to rise beyond the expected rate hike to 3.75 pct in March.

The single currency dipped slightly earlier in the day after this morning's key German Ifo business climate showed a bigger-than-expected fall, but soon recovered as markets concluded that the data remain consistent with robust growth. Moreover, business confidence surveys out of France, Italy and Belgium yesterday were all well above forecasts, while French household consumption data this morning were also very strong.

'The news out of the euro zone is still positive and the ECB is not done with hiking rates,' said Marios Maratheftis, currency analyst at Standard Chartered.

Investors are starting to look ahead to the ECB's next interest rate decision on March 8, when borrowing costs are fully expected to rise to 3.75 pct, with many forecasting another quarter point rise in June as well.

Maratheftis said the interest rate outlook in the euro zone contrasts with the situation in the US, where data are consistent with a soft landing and the Federal Reserve leaving interest rates on hold.

He added that the rebound in the dollar following Wednesday's slightly stronger-than-expected US CPI data was also overdone, given that it does not signal any real change in the outlook for US inflation.

'There was some overreaction in the dollar rebounding earlier this week,' he said.

Elsewhere, the pound was also firmer, rising well above the 1.96 level against the dollar to reach an eight-day high of 1.9654 usd as strong UK GDP data this morning continued to point to the Bank of England raising interest rates further in the coming months, possibly as early as next month.

UK economic growth for the fourth quarter was confirmed at an above-trend 0.8 pct from the third quarter and 3.0 pct from a year ago. The data round off a week of solid UK data, including strong mortgage lending and money supply data and a better-than-expected manufacturing survey from the CBI.

'We believe there is still one more hike to come from the Bank of England, taking interest rates to 5.50 pct, which would make sterling very attractive in terms of interest rate differentials,' Maratheftis said.

London 1534 GMT London 1359 GMT

US dollar

yen 121.04 down from 121.24

sfr 1.2315 down from 1.2380

Euro

usd 1.3176 up from 1.3133

stg 0.6710 up from 0.6695

yen 159.51 up from 159.23

sfr 1.6225 down from 1.6253

Sterling

usd 1.9636 up from 1.9619

yen 237.70 down from 237.77

sfr 2.4177 down from 2.4280

Australian dollar

usd 0.7919 up from 0.7900

stg 0.4032 up from 0.4026

yen 95.84 up from 95.770

jessica.mortimer@thomson.com

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