Euro rise to 14-month high vs dollar before ECB

By Wanfeng Zhou

NEW YORK (Reuters) – The euro rose on Wednesday to a 14-month high against the dollar on speculation the European Central Bank will signal further interest rate rises following an expected increase this week, though there’s room for disappointment.

The yen slid to an 11-month low against the euro and a six-month low against the dollar. More losses were expected for the yen as investors such as macro hedge funds add to bearish bets, with the Bank of Japan looking set to lag other central banks in tightening policy.

The ECB is widely expected to raise its benchmark rate by 25 basis points on Thursday, its first increase since July 2008. Many analysts expect ECB President Jean-Claude Trichet to continue sounding a hawkish tone on inflation, which would stoke market expectations for more rate rises this year.

“The markets are very bullish with respect to the anticipated Trichet communique tomorrow. They expect quite strongly that the ECB is heading toward normalization of monetary policy,” said Dean Popplewell, chief currency strategist at OANDA in Toronto.

The expectation for higher euro zone rates contrasted with uncertainty in the United States over when the Federal Reserve may begin to tighten policy. The U.S. economy remains too fragile for the Fed to begin raising rates, Atlanta Fed President Dennis Lockhart said on Wednesday.

The euro rose as high as $1.4350, according to Reuters data, its highest since late January 2010. It was last up 0.8 percent at $1.4334, shrugging off an announcement from Portugal’s caretaker government that it needs financing from the European Union.

Traders reported steady buying by Asian central banks, but said large option barriers cited at $1.4350 and $1.4400 could cap gains in the near term.

Citigroup currency strategist Todd Elmer said euro zone rate expectations are close to their recent peaks, with money markets discounting more than 100 basis points of ECB tightening through November.

“Expectations for ECB hawkishness are at unprecedented levels since the onset of the financial crisis and this could leave room for disappointment if President Trichet fails to validate the moves in market interest rates at his press conference tomorrow,” he said in a note to clients.

CARRY TRADE REVIVES

The struggling yen was in danger of breaching key long-term support levels against most currencies, having already fallen to a 2-1/2-year low against the Australian dollar.

The yen has slid since the first G7 intervention in a decade last month after the earthquake in Japan, stirring talk of a carry trade revival — a strategy of selling low-yielding currencies to fund investment in currencies with higher interest rates.

“The yen is taking a lead as the global carry trade makes a return with the Bank of Japan likely to ease policy while the other central banks seek to tighten it,” said Lena Komileva, head of G-10 currency strategy at Brown Brothers Harriman in London.

The euro was up 1.4 percent at 122.45 yen, having earlier touched an 11-month peak, with stop-loss buying earlier in the session adding to its rise.

The dollar was up 0.6 percent at 85.43 yen, after hitting a six-month peak of 85.52 yen, almost 10 yen above its record low of 76.25 yen hit in March, days after Japan’s northeast was devastated by a massive earthquake and tsunami.

The high-yielding Australian dollar surged to 89.28 yen, its highest since September 2008, with 90 yen seen as the next possible target.

Against a basket of currencies, the dollar was down 0.5 percent at 75.540 (.DXY: Quote, Profile, Research).

(Additional reporting by Nick Olivari; Editing by James Dalgleish)

Euro rise to 14-month high vs dollar before ECB