Thursday, March 6, 2008

Euro at Record High as Trichet Sees `Upward' Inflation Pressure

By Bo Nielsen

March 7 (Bloomberg) -- The euro traded at a record high against the dollar after European Central Bank President Jean- Claude Trichet said there is ``strong upward pressure on inflation,'' signaling he's in no hurry to cut interest rates.

Europe's 15-nation currency yesterday also reached an all- time high versus the U.K. pound as policy makers left the euro region's main rate at 4 percent, matching the forecast in a Bloomberg News survey. The yen rallied to the strongest since January 2005 compared with the dollar as tumbling stocks led traders to exit carry-trade purchases of higher-yielding securities funded with yen loans.

Trichet's comment ``gives the green light to sell the dollar,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``He's suggesting the ECB won't do anything overt to support the U.S. dollar.'' The remark indicated ``it's a hard time for the ECB to cut rates.''

The euro climbed to $1.5395, the highest level since its 1999 debut, before trading at $1.5393 at 7:53 a.m. in Tokyo. The yen rose to 102.46 per dollar, the highest since Jan. 28, 2005, before trading at 102.50 from 102.67 late yesterday. The euro bought 157.80 yen from 157.92.

The euro set a record for the eighth trading day in the past nine. After holding in a range since November of about $1.43 to $1.49, the euro began to rally after Fed Vice Chairman Donald Kohn said Feb. 26 that credit-market turmoil and slower growth pose a ``greater threat'' than inflation. The comments drove the euro above $1.50 for the first time.

`Pressures on Inflation'

``The latest information has confirmed the existence of strong upward pressures on inflation,'' Trichet said at a press conference in Frankfurt.

He also said policy makers ``don't underwrite the present future market interest rates'' and said he noted ``with extreme attention'' remarks from President George W. Bush last week that a strong dollar is in U.S. interests. Fellow policy maker Axel Weber said Feb. 27 investors betting on rate cuts in Europe are underestimating inflation.

``The market took the fact that he ducked the question about the dollar as a tacit acceptance of its weakness,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York.

The euro was at 76.56 British pence after yesterday advancing to an all-time high of 76.92 pence after the Bank of England kept borrowing costs at 5.25 percent.

Goldman's Pound Call

Goldman Sachs Group Inc. yesterday advised clients to buy the pound with an ``initial'' target of $2.06, analysts Thomas Stolper, Jens Nordvig and Kevin Edgeley wrote in a note. The U.K. economic outlook ``now looks more balanced,'' they said. The pound rose above $2 yesterday for the first time in two months.

The euro gained 17 percent against the dollar in the past year, undermining European exports. The synthetic euro, which estimates the European currency's value before its inception in 1999, advanced to the strongest level since at least January 1989, when Bloomberg's data on the measure began.

The U.S. Dollar Index traded on ICE Futures in New York declined for an eighth straight day yesterday, to a record low of 72.863 as an industry report showed U.S. mortgage foreclosures rose to a record at the end of 2007. The dollar touched a record low of 1.0214 Swiss francs.

Buying Yen

The central bank may need to keep rates low ``for some time'' if financial markets remain under stress, New York Fed President Timothy Geithner said in remarks to the Council on Foreign Relations in New York today.

Futures show traders see a 96 percent chance the Fed will lower its target rate 0.75 percentage point to 2.25 percent on March 18. The balance of bets is on a half-point cut.

Dollar losses against the yen deepened yesterday after CIFG Guaranty lost its Aaa bond insurer rating at Moody's Investors Service because of its exposure to the mortgage market. The rating was cut four levels to A1. CIFG insured $95 billion of debt as of year-end, according to its Web site.

The yen gained versus the 16 most-traded currencies as U.S. stocks fell on concern that credit losses will deepen. The yen gained 2.2 percent versus the Australian and 2 percent versus the New Zealand dollar.

The Standard & Poor's 500 Index dropped 2.2 percent. Falling stocks spur traders to shed high-yielding securities funded with loans in Japan. Japan's benchmark rate of 0.5 percent compares with 8.25 percent in New Zealand and 7.25 percent in Australia.

The U.S. currency may fall further before a government report today forecast to show the jobless rate rose to 5 percent in February from 4.9 percent the prior month. Payrolls probably expanded by 23,000, short of the roughly 100,000 needed to keep pace with increases in the labor force, according to the median estimate of economists surveyed by Bloomberg News. The economy lost 17,000 jobs in January.

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