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FOREX-Euro up against yen on hawkish ECB, flat vs dollar
Thu Sep 28, 2006 2:27pm ET
By Steven C. Johnson
NEW YORK, Sept 28 (Reuters) - Tough talk on inflation from European policymakers lifted the euro to a one-week high versus the yen on Thursday but left it flat against the dollar despite slower-than-expected U.S. growth in the second quarter.
The euro hit 149.78 yen <EURJPY> -- its highest since last breaching the 150 level on Sept. 19 -- after ECB governing council members Axel Weber and Nicholas Garganas both said more interest rate hikes were needed to ward off inflation.
In recent trade, it had retreated slightly to 149.69 yen but remained up 0.3 percent on the day.
The ECB has lifted rates, now at 3 percent, four times since last December and financial markets expect another quarter-percentage-point hike at its next policy meeting in October.
That boosted the euro in particular against the low-yielding Japanese currency, which remains vulnerable to "carry trades" in which investors borrow yen cheaply then boost returns by selling them to buy higher-yielding currencies.
"The yen has been under constant pressure of late, and a key driver today has been the hawkish tone from the euro zone," said Ron Simpson, director of global currency analysis at Action Economics in Tampa, Florida.
ECB officials "are talking a great game" on inflation, said Chris Furness, senior currency strategist at 4Cast in London, but said the jury is out on whether they are overestimating the upside inflation risks.
A key piece of evidence could be Friday's euro zone inflation data, expected to show price gains easing to 1.9 percent over the last 12 months through September from 2.3 percent through August.
That may inject some volatility into the sedate euro-dollar exchange rate, Furness said, with the euro possibly testing the $1.2650 area that has served as solid euro support this month.
The euro was unchanged at $1.2702 <EUR>, as investors shrugged off backward-looking data showing the U.S. economy grew at 2.6 percent annual rate in the second quarter, below the 2.9 percent estimated a month ago. For more details, see [ID:nN27364625].
Other data releases this week have been mixed, helping keep a floor under the dollar, traders said, particularly increases in consumer confidence and new home sales in August.
"The market has been betting against the dollar for some time, and slowly but surely, we've seen some stale dollar short positions get unwound," Simpson said.
Being "short" a currency is effectively a bet it will weaken, while being "long" is a bet it will strengthen.
The dollar climbed 0.3 percent to 117.84 yen <JPY> and was firmer against other major currencies as well.
Strategists said the start of a new fiscal half-year in Japan was weighing on the yen, as Japanese investors pull money out of domestic assets and into higher-yielding ones overseas.
Both the euro and dollar gained against sterling, which fell as U.K. bond yields rose after a calculation error in U.K. inflation data shifted market expectations on U.K. interest rates, said Robert Lynch, head of G10 FX strategy for the Americas at HSBC in New York.
Midafternoon, the euro was up 0.7 percent at 0.6770 pence <EURGBP> while the pound was off 0.7 percent at $1.8755 <GBP>.
Simpson said the next big catalyst could be U.S. economic reports on inflation and Chicago-area manufacturing on Friday.
The key, he said, will be whether either can knock the euro out of a tight $1.2628-$1.2874 range that has prevailed in September. (Additional reporting by Nick Olivari and John Parry in New York and Natsuko Waki in London)
Thu Sep 28, 2006 2:27pm ET
By Steven C. Johnson
NEW YORK, Sept 28 (Reuters) - Tough talk on inflation from European policymakers lifted the euro to a one-week high versus the yen on Thursday but left it flat against the dollar despite slower-than-expected U.S. growth in the second quarter.
The euro hit 149.78 yen <EURJPY> -- its highest since last breaching the 150 level on Sept. 19 -- after ECB governing council members Axel Weber and Nicholas Garganas both said more interest rate hikes were needed to ward off inflation.
In recent trade, it had retreated slightly to 149.69 yen but remained up 0.3 percent on the day.
The ECB has lifted rates, now at 3 percent, four times since last December and financial markets expect another quarter-percentage-point hike at its next policy meeting in October.
That boosted the euro in particular against the low-yielding Japanese currency, which remains vulnerable to "carry trades" in which investors borrow yen cheaply then boost returns by selling them to buy higher-yielding currencies.
"The yen has been under constant pressure of late, and a key driver today has been the hawkish tone from the euro zone," said Ron Simpson, director of global currency analysis at Action Economics in Tampa, Florida.
ECB officials "are talking a great game" on inflation, said Chris Furness, senior currency strategist at 4Cast in London, but said the jury is out on whether they are overestimating the upside inflation risks.
A key piece of evidence could be Friday's euro zone inflation data, expected to show price gains easing to 1.9 percent over the last 12 months through September from 2.3 percent through August.
That may inject some volatility into the sedate euro-dollar exchange rate, Furness said, with the euro possibly testing the $1.2650 area that has served as solid euro support this month.
The euro was unchanged at $1.2702 <EUR>, as investors shrugged off backward-looking data showing the U.S. economy grew at 2.6 percent annual rate in the second quarter, below the 2.9 percent estimated a month ago. For more details, see [ID:nN27364625].
Other data releases this week have been mixed, helping keep a floor under the dollar, traders said, particularly increases in consumer confidence and new home sales in August.
"The market has been betting against the dollar for some time, and slowly but surely, we've seen some stale dollar short positions get unwound," Simpson said.
Being "short" a currency is effectively a bet it will weaken, while being "long" is a bet it will strengthen.
The dollar climbed 0.3 percent to 117.84 yen <JPY> and was firmer against other major currencies as well.
Strategists said the start of a new fiscal half-year in Japan was weighing on the yen, as Japanese investors pull money out of domestic assets and into higher-yielding ones overseas.
Both the euro and dollar gained against sterling, which fell as U.K. bond yields rose after a calculation error in U.K. inflation data shifted market expectations on U.K. interest rates, said Robert Lynch, head of G10 FX strategy for the Americas at HSBC in New York.
Midafternoon, the euro was up 0.7 percent at 0.6770 pence <EURGBP> while the pound was off 0.7 percent at $1.8755 <GBP>.
Simpson said the next big catalyst could be U.S. economic reports on inflation and Chicago-area manufacturing on Friday.
The key, he said, will be whether either can knock the euro out of a tight $1.2628-$1.2874 range that has prevailed in September. (Additional reporting by Nick Olivari and John Parry in New York and Natsuko Waki in London)
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