MONEY MARKETS-Eurodollar futures point to half point hike by 2012

* Likely ECB rate increase this week to add pressure on Fed

* Bernanke speech seen tempering recent Fed hawkish comments

By Saikat Chatterjee and Richard Leong

HONG KONG, April 4 (Reuters) – Eurodollar futures contracts
expiring in March 2012 are forecasting a half point increase in
U.S. interest rates, helped by increasing evidence that the
economic is gaining momentum.

A widely expected rate increase by the European Central Bank
on Thursday could also add pressure on the Federal Reserve to
begin reversing its super-loose monetary policy.

Such an increase would be the ECB’s first rate hike since
October 2008 and widen interest rate differentials further
between the U.S and Europe.

A surge in eurodollar futures in early March fuelled by
expectations that the earthquake in Japan would stay the Fed’s
hand in tightening policy has taken a sharp U-turn in the past
two weeks due to hawkish comments from some Fed officials.

While the disaster could push the Japanese economy back into
recession for a few quarters, analysts now do not expect it to
have a major impact on global economic growth.

Eurodollar 2012 futures contracts (0#ED:: Quote, Profile, Research) settled around
99.15 on Monday, implying a dollar LIBOR of 0.85 percent,
compared with 0.65 percent in mid-March. Three-month dollar
LIBOR are at 0.30 percent currently.
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A graph on U.S. unemployment, see http://r.reuters.com/mab88r
Payroll numbers relative to 10-year Treasuries, see

http://r.reuters.com/dub88r
For a Reuters insider preview, see http://bit.ly/ez9byH

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Barclays strategists said the March employment report, which
showed the U.S. jobless rate slipping to 8.8 percent, signaled a
continuation of the trend towards solid business expansion,
notwithstanding risks such as the Middle East unrest and rising
commodity prices.

Even though the shift in rate expectations has led to some
heavy profit-taking in the eurodollar and fed fund futures
markets, a majority of analysts in a Reuters poll do not expect
a rate hike in 2011. [ID:nTOE733002].

“The message here is that we do not believe the softness in
the first quarter data should be interpreted as the start of a
significant slowdown,” they said.

Underlining that optimistic view, hawkish comments from some
Fed officials hurt the market last week with two-year Treasuries
, seen as among the most vulnerable to interest rate
risk, underperforming longer-dated debt including 10-year notes.

Two-year notes briefly tested support at yields
of around 0.89 percent on Friday, their highest levels since
last May before subsiding to around 0.80 percent on Monday.

The gap between two-year and 10-year note yields has
narrrowed to around 266 basis points from 283 bps on March 8.

Players in the fed fund futures markets (0#FF:: Quote, Profile, Research) are
expecting about 40 bps of increase in U.S rates by March 2012.

Rate markets are also eyeing a speech by Fed chief Ben
Bernanke later in the day where he might temper some of the
recent hawkish comments by other Fed officials.

(Editing by Kim Coghill)

MONEY MARKETS-Eurodollar futures point to half point hike by 2012