Euro supported by rate view; yen gives ground

By Ian Chua

SYDNEY (Reuters) – The euro held its ground early in Asia on Tuesday after comments from the head of the European Central Bank bolstered views for an interest rate hike, while a widening interest rate differential helped the dollar higher on the yen.

The euro last traded at $1.4074, having briefly popped above $1.41 after ECB President Jean-Claude Trichet said inflation in the euro zone is “durably” above the ECB’s target, putting interest rates front and center.

“EU periphery issues remain raw, but Trichet reminded that the ECB remains poised to hike rates soon. The ECB Governing Council meets on 7 April and is expected to hike rates 25 basis points,” David Watt, strategist at RBC, wrote in a client note.

Trichet’s comments helped the euro turn around from one-week lows near $1.4020 plumbed on Monday, after sentiment was hammered by a barrage of bad news including the loss of a key state election by Germany’s ruling party.

Still, the common currency is not out of the woods yet with investors closely watching the results of the European Union bank stress tests on Thursday, where Irish banks are in focus.

The test of the banks’ reserves under adverse scenarios is required under the terms of the EU/IMF bailout and is expected to show a fresh capital hole of between 18 billion and 23 billion euros, local Irish media has reported.

With the euro firmer, the dollar index (.DXY: Quote, Profile, Research), which tracks its performance against a basket of major currencies, was a touch softer at 76.204, down from one-week highs at 76.435.

The dollar, however, kept a firm footing against the yen. It rose to the highest level since a rare coordinated intervention to rein in the yen nearly two weeks ago, thanks in part to widening interest rate differentials.

The two-year U.S. Treasury yield rose to three-week highs at 0.785 percent at one stage, up more than 14 basis points in five days, widening its gap over comparable Japanese yields.

“If a sell-off in U.S. Treasuries continues, then USD/JPY will likely push higher,” said analysts at BNP Paribas, adding non-farm payrolls on Friday will be a key catalyst.

The message from Fed officials has been mixed however. After hawkish comments from two well-known inflation hawks, another two officials said the U.S. economy still needed support from the central bank’s full $600 billion planned bond purchases, despite signs of a self-sustaining recovery.

Meanwhile, sterling nursed losses after weak UK data raised questions about how soon the BoE can raise rates.

The pound last traded at $1.5986, having fallen as low as $1.5937. It is seen vulnerable to a drop toward $1.5750, having pierced $1.60.

In contrast, the high-flying Aussie was consolidating at $1.0240 after striking a fresh 29-year high at $1.0315.

Westpac analysts said the Aussie was looking tired after gaining 6 cents in 11 days, and looked ready for a modest correction toward $1.02.

(Editing by Wayne Cole)

Euro supported by rate view; yen gives ground