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Foreign Exchange

Euro holds gains as ECB set to lift rates ahead of Fed

The euro hovered near a one-month high against the dollar early on Monday, amid expectations that the European Central Bank is set to signal imminent further rises in interest rates when it meets this week.

The euro was given a major boost on Friday after EU and IMF officials completed their review of Greece’s plan for €78 billion ($114 billion) in asset sales and austerity measures – with “no major hiccups”, according to a spokesman for Greek prime minister George Papandreou. The Wall Street Journal reported over the weekend that eurozone governments have reached a tentative deal for a €30 billion private-sector participation in a new package to finance the Greek economy.

“The ECB is unlikely to act this week, but it certainly has another move penciled in,” said Michael Derks, chief currency strategist at FX Pro. “The euro has been helped by unambiguous signs that the US recovery is losing traction, which is weakening the dollar, and at the moment the market is focusing on that rather than on issues around the euro sovereign story.”

Asian central banks and sovereign wealth funds have been big buyers of the euro in the past week, as part of a longer-term trend of diversifying out of the dollar, Derks said.

ECB policy-makers are likely to use the term “vigilance” when they meet on Thursday, signalling that the next rate hike will be in July, said Elsa Lignos, senior currency strategist at RBC Capital Markets, in a note. In April the ECB lifted its key rate to 1.25 percent from a record low of 1 percent. The US Federal Reserve has signalled that its primary rate will remain at its current record low of 0-0.25 percent “for an extended period”.

The euro rose to 1.4646 against the dollar early on Monday, the highest level since May 4, compared with 1.4635 earlier. The euro had rallied from as low as 1.4492 since Friday.

Producer prices in the euro region climbed 6.6 percent in April from their levels a year earlier, a report on Monday is likely to show, according to a Bloomberg survey, after a 6.7 percent increase in March, the highest since September 2008.

The risk to the euro on the downside is that the ECB fails this week to maintain expectations for a hike sooner rather than later, said a strategist at a leading European bank.

“To some extent, the rate news on the euro is priced in, so if we see a less hawkish tone from the ECB, then the euro could fall back from current levels,” he said.

The US economic outlook remains weak, said analysts, after a string of disappointing economic figures last week culminated on Friday with the weakest jobs report for eight months, suggesting that the world’s largest economy is struggling to recover from the global slowdown.

Stocks in Asia fell on Monday, with Japan’s Nikkei 225 index declining 1.2 percent, and London’s FTSE 100 index opening lower, as the price of oil hit a two-week low.

The Australian dollar rose 0.0039 to $1.0755, its highest level since May 10, ahead of a central bank meeting on Tuesday at which policy-makers are likely to leave rates unchanged, analysts said, after a mixed run of domestic data and uncertainty over the global backdrop. The Australian economy contracted 1.2 percent in the first quarter, after floods and cyclones hit business activity.

The pound traded little changed against the euro on Monday at 1.1220, the lowest level since May 4. The Bank of England meets on Thursday, with economists predicting that the Monetary Policy Committee (MPC) will leave the key rate on hold at a record low of 0.5 percent, amid concern over the pace of recovery.

“Recent communication suggests that the centre of gravity within the MPC is shifting away from a near-term hike,” said Adrian Paul, an analyst at Goldman Sachs, in a note. “As long as the recovery in official GDP seems to stall… the weight of opinion on the MPC looks set to lean towards maintaining loose monetary policy for longer.”

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