Euro slips amid market nervous on ECB rate path

By Neal Armstrong

LONDON (Reuters) – The euro slipped from multi-month highs on Thursday with the market fearful of a scaling back of expectations for more euro zone interest rate rises this year, ahead of a widely expected tightening at 1145 GMT (7:45 a.m. EDT).

The ECB is still set to raise its benchmark rate by 25 basis points for the first time since July 2008. Portugal’s request for a European bailout has not changed the view the ECB would follow up with more interest rate hikes, but many believe the euro has risen too fast too far and is overdue a correction.

Portugal became the third euro zone member to seek a bailout from the European Union, with the size of the package expected to be up to 80 billion euro ($114 billion).

Analysts say ECB President Jean-Claude Trichet must sound hawkish enough to keep alive expectations for another two rate hikes by year-end for the euro to hold recent strong gains.

The tone of Trichet’s introductory statement is likely to be crucial after last month’s reference to “strong vigilance” regarding price pressures was widely interpreted as signaling a rate hike was imminent. The single currency has risen over 3 percent since Trichet’s comments on March 3.

Trichet will need to make reference to “close monitoring” of price pressures today to signal further rate rises are likely later in the year.

“The market is generally expecting Trichet to refer to “close monitoring” which would probably be the signal for the next hike in June. This would be net neutral for the euro,” said Stephen Gallo, Head of Market Analysis at Schneider Foreign Exchange.

Gallo said the market would also focus on a Spanish auction of around 3.5 billion euros of a new three-year benchmark bond on Thursday, adding there was a risk that with Portugal’s bailout under way, markets would focus more heavily on Spain’s debt problems.

The euro was down 0.3 percent on the day at $1.4284, having risen to $1.4350 on Wednesday, its highest since late January 2010. Traders said option-related supply was widespread into the $1.4400 area, protecting barriers expiring in the next few weeks.

A major Asian sovereign account was reportedly also keen to sell euros in the $1.4320 region.

“The market is fully expecting Trichet to remain (hawkish) so one would surmise the risk is for a correction lower in the euro,” said a London-based trader, who reported strong interest to sell the euro against the dollar at $1.4350 and versus the yen in the 122.50 area.

DOLLAR RISES

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 dollar was up 0.2 percent at 75.706 against a basket of currencies.

The yen held above a six-month trough against the dollar. The Bank of Japan met market expectations that it would keep monetary policy steady and signal its readiness to ease policy further, bucking a global trend of central banks withdrawing excess liquidity put in place during the financial crisis.

The dollar had risen as high as 85.54, almost 10 yen above its record low of 76.25 yen hit in March, days after northeast Japan’s devastating earthquake. It slipped back to trade around 85.22 in European dealing.

The euro was down two thirds of a percent at 121.72 yen after hitting an 11-month peak on Wednesday.

The Australian dollar scaled a fresh 29-year peak against the greenback of $1.0481 and rose to 89.45 yen, its highest since September 2008, after data showed the Australian economy added a higher-than-expected 37,800 jobs in March.

(Additional reporting by Natsuko Waki, editing by Toby Chopra)

Euro slips amid market nervous on ECB rate path