MONEY MARKETS-Euro rates rise ahead of likely rate hike

* Markets wait on likely euro zone rate hike

* Risk seen that ECB could sound more hawkish than expected

* Margin call could slow Portuguese repo market

By Kirsten Donovan

LONDON April 7 (Reuters) – European money market rates rose
on Wednesday to 21-month highs as traders positioned for the
European Central Bank to raise interest rates at its Thursday
meeting for the first time in nearly three years.

Current money market rates reflect expectations the ECB’s
main refinancing rate, currently at a record low 1.0 percent,
will reach 1.75 percent by the end of the year, with a first 25
bps hike fully priced in for Thursday.

“The risk is they signal a slightly more aggressive rate
hike this cycle and so we see a shift from expectations of two
or three hikes to three or four,” said one trader.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic on the euro zone's struggle with debt, click on http://r.reuters.com/hyb65p For a graphic showing Fed hawks vs. doves, click on http://link.reuters.com/ryv97p ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

But the ECB may be deterred from raising rates further by
continued fiscal problems in Portugal and Spain and bank rescue
costs in Ireland, analysts said. Conflict in Libya and the
Middle East and Japan’s struggle to contain the worst nuclear
crisis in decades after last month’s devastating earthquake and
tsunami could also encourage caution.

“Given the uncertainties around global growth, and
peripheral governments and banks, it would be hard for the ECB
to deliver more than is priced in by the market while the (U.S.
Federal Reserve) remains on hold,” Deutsche Bank rate
strategists Mark Well and Francis Yared said in a note.

The Fed is seen as unlikely to tighten policy until early
2012 as policymakers appear split on the timing of an end to its
near-zero rate policy and other extraordinary measures brought
in since 2008 to ease the effects of the financial crisis.
[ID:nN05140054].

Benchmark three-month euro Libor rates (EUR3MFSR=: Quote, Profile, Research) fixed a
basis point higher at 1.21938 percent.

Portugal managed to raise another 1 billion euros although
it had to pay up at Wednesday’s sale of six- and 12-month
T-bills, with borrowing costs at euro lifetime highs and rising.

Analysts now expect clearing house LCH.Clearnet to raise the
margin requirement to trade Portuguese government bonds, as it
did when Irish bond yields soared.

“LCH.Clearnet must now be on the brink of imposing margin
calls for transactions involving Portuguese collateral,” said
ICAP strategist Chris Clark.

“When that happened with Ireland, the effect on repo volumes
was very pronounced. With the Portuguese bond market all but
dried up, with extremely challenging liquidity conditions, given
the Irish experience we would expect to see the volume of
Portuguese transactions fall significantly.”

Portuguese banks have threatened to stop buying government
debt, of which they are major holders, urging the caretaker
cabinet to seek a short-term loan to tide it over a pre-election
limbo [ID:nLDE7340WP].

The banks have been unable to raise funds for the best part
of a year and analysts say they may need to raise their capital
ratios to cope with the difficult environment and reduce their
dependence on ECB loans.
— Additional reporting by Richard Leong in Hong Kong
(Reporting by Kirsten Donovan; Editing by Catherine Evans)

MONEY MARKETS-Euro rates rise ahead of likely rate hike