Monday, May 5, 2008

Euro May Extend Gain on Bets ECB to Hold Rate at Six-Year High

By Bo Nielsen

May 6 (Bloomberg) -- The euro may extend its gain versus the dollar on speculation the European Central Bank will hold its main refinancing rate at a six-year high this week to control inflation.

The 15-nation currency advanced the most in almost two weeks yesterday as ECB President Jean-Claude Trichet said risk of inflation is ``significant'' and the price of oil surged above $120 a barrel. Norway's krone and the Australian and New Zealand currencies advanced against the U.S. dollar as commodities rallied.

``The ECB meeting is a catalyst for a bit of euro strength,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. The central bank ``remains very much focused on inflation.''

The euro traded at $1.5498 at 6:01 a.m. in Tokyo, after increasing 0.5 percent yesterday. It reached a record $1.6019 on April 22. The euro was little changed at 162.52 yen. The dollar traded at 104.86 yen, following a 0.5 percent drop yesterday.

A rally in commodities yesterday helped Norway's krone rise 1 percent against the U.S. currency, while Australia's dollar increased 1.3 percent and New Zealand's dollar advanced 0.7 percent. Norway is the world's fifth-biggest oil exporter. Exports of raw materials contribute about 17 percent to Australia's economy. More than a third of New Zealand's export income comes from meat, wool and dairy.

The UBS Bloomberg Constant Maturity Commodity Index rose 0.8 percent yesterday for its second straight day of gains.

ECB Rate

The ECB will leave its main refinancing rate at 4 percent when policy makers meet May 8, according to all 53 economists surveyed by Bloomberg News. The Federal Reserve cut the target rate for overnight lending by a quarter-percentage point to 2 percent on April 30, the seventh reduction since September.

``The U.S. is going to continue to follow policies that make the dollar weaker,'' said Warren Buffett, chief executive officer of Berkshire Hathaway Inc., during Omaha, Nebraska-based Berkshire's annual shareholder meeting on May 3. He also said that he feels ``no need'' to hedge against currency risk when buying large companies outside the U.S.

Inflation expectations in the euro region, measured by the difference between the yields of nominal and inflation-protected bonds, increased. The so-called breakeven rate on 10-year French inflation-linked notes rose to 2.33 percentage points yesterday, from 2.08 percentage points a year ago, reflecting the rate of inflation investors expect over the next decade.

Trichet on Inflation

``Inflation risks are significant,'' said Trichet at a press conference yesterday in Basel, Switzerland. There's ``no time for complacency.'' He chaired a meeting of central bankers from the Group of 10 industrialized nations.

The dollar briefly extended its decline against the euro yesterday after a quarterly Fed survey showed a net 70 percent of U.S. banks increased loan rates over their cost of funds for commercial and industrial borrowing. That compares with 45 percent in the January survey, the Fed said.

Traders are betting for the first time since December 2005 that the dollar will gain versus the European currency, according to figures from the Washington-based Commodity Futures Trading Commission.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain, known as net shorts, was 21,315 on April 29, compared with net longs of 18,907 a week earlier.

U.S. data ``is still showing the economy is slowing while the ECB will still sound hawkish this week,'' said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. ``The euro is still supported.''

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