Euro Lower After Trichet; Yen Slumps As Carry Back In Vogue
The euro dropped against the dollar after the European Central Bank on Thursday raised its key interest rate by a quarter-percentage point as expected and hinted that future rate increases may be fewer and later than previously thought.
The ECB, which sets interest-rate policies in the 13 countries that use the euro as their currency, hiked its key interest rate to 3.75%. The move was widely expected. At a post-meeting press conference, ECB President Jean-Claude Trichet said there are upside risks to medium-term stability and rates remain accommodative. Trichet also said that the central bank will monitor price risks very closely.
"Had Trichet not mentioned accommodative the market would have interpreted it as a pause and taken the euro lower, but he managed to modify it slightly...suggesting further ECB rate hike are coming, but that they might be fewer and later than previously thought," said Brian Dolan, director of research at Forex.com, a division of Gain Capital.
"This leaves the ultimate outcome for the euro somewhat in doubt, and profit- taking after the two day run-up remains likely," he said.
In early New York trading, the dollar was quoted at 117.16 yen, compared with 115.99 yen late Wednesday. The euro stood at $1.3149, compared with $1.318.
The British pound traded at $1.9286, compared with $1.9332. The dollar changed hands at 1.2231 Swiss francs, compared with 1.2169 francs.
The euro fetched 154 yen, compared with 152.90 yen.
David Brown, an analyst at Bear Stearns, said "it looks like ECB rate policy is in a state of flux, but rates have still not peaked at 3.75%."
"Judging by Trichet's latest intimations the tightening bias remains intact and ECB rates should be heading to 4.0% as the next policy stop," he said, in a note. "Timing is the issue now."
The dollar registered little reaction to a Labor Department report showing initial jobless claims fell 10,000 last week.
The dollar fell on Wednesday after the Federal Reserve's latest survey on regional economic conditions noted some slowing in about a third of the country. Speculation a report Friday will show the U.S. economy added fewer jobs than forecast further weighed on the greenback.
Also on Thursday, the Bank of England kept interest rates on hold for the second month in a row after a sharp fall in January's inflation figure gave the bank more time to asses the impact of three recent hikes. The decision to hold the key rate at 5.25% was in line with the consensus expectation, though a minority of economists had been forecasting a hike.
Yen slumps as carry resumes
Meanwhile, the yen tumbled against the dollar and other higher-yielding currencies amid market talk of renewed interest in carry trades. Carry trades refer to the practice of investors borrowing or selling low-yielding currencies, such as the yen and the Swiss franc, and reinvesting in higher-return currencies and assets.
"Traders once again plowed into the pair re-establishing carry trades liquidated only a few days ago," said Boris Schlossberg, senior currency strategist at DailyFX.com, in a note.
"Helped by yesterday's [0.25 percentage point] hike from the Reserve Bank of New Zealand which raised rates on the New Zealand dollar to 7.5%, market appetite for high yielding currencies returned as the lure of still materially wide interest rate spreads was irresistible for some market players."
Yuan at high as Paulson visits
Elsewhere, the Chinese yuan rose to its highest level versus the U.S. dollar on Thursday, coinciding with an address by U.S. Treasury Secretary Henry Paulson in Shanghai.
The yuan, also known as the renminbi, firmed to 7.7360 on Thursday, compared to Wednesday's close at 7.7400. The yuan has showed cumulative appreciation of about 4.8% since Beijing revalued its currency by 2.1% in July 2005.
Since the beginning of February the Chinese currency has risen about 0.5% against the dollar. Year-to-date the yuan is up about 1% against the greenback.
China should open its financial sector to foreign competition, including allowing foreign ownership of its banks, U.S. Treasury Secretary Henry Paulson said.
