Daily FX Commentary

Euro up on hawkish Trichet; yen trips as stocks rise

 

By Rodian Rahnayev

Finotec Analysis Team

07 December 2007

 

 

Â	EUR/USD	USD/JPY	GBP/USD	USD/CHF
Resistance	1.4745 1.4675 1.4650	112.60 112.05 111.75	2.0405 2.0370 2.0310	1.1450 1.1395 1.1350
Support	1.4520 1.4490 1.4405	111.00 110.65 110.05	2.0230 2.0185 2.0140	1.1265 1.1225 1.1160

The euro rose against the dollar and yen on Thursday as European Central Bank President Jean-Claude Trichet’s hawkish comments on inflation raised the specter of an interest rate hike in the euro zone.

The single currency also got a boost from an improvement in risk appetite, with U.S. stocks ending higher after U.S. President George W. Bush announced plans aimed at slowing the tide of homeowner foreclosures and shield the economy from the subprime mortgage crisis.

An estimated 1.2 million homeowners could benefit from the assistance plan to avoid foreclosure over the next couple of years, according to Bush.

The ECB left its benchmark interest rate steady at 4 percent, but Trichet warned of “strong upward pressure” on inflation, adding that some central bank governors had favored a rate increase.

Against the yen, the dollar rose 0.3 percent to 111.22, lifted by firmer U.S. stocks, but lost ground against the high-yielding Australian and New Zealand currencies.

Before the ECB’s rate decision, financial markets had expected the bank would not raise rates at all during 2008, with a significant minority forecasting a cut.

The dollar, which had traded higher prior to the ECB rate verdict, was also held back as traders became cautious ahead of November’s nonfarm payrolls report on Friday, analysts said.

They reckon the jobs data could determine whether the Federal Reserve cuts its benchmark overnight lending rate by just 25 basis points to 4.25 percent or by half a percentage point next Tuesday.

The surprisingly stronger reading from the U.S. ADP private sector jobs report buoyed the dollar on Wednesday and handed the euro its biggest one-day drop since July 2006.

Sterling earlier fell to a fresh two-month low versus the dollar after the Bank of England cut rates by 25 basis points to 5.50 percent.

It reversed losses to last trade 0.1 percent higher at $2.0262, as traders speculated that the step might not be followed by further monetary easing for a few months, with BoE’s statement viewed as balanced.

The BoE cut follows a surprise easing from Canada on Tuesday, suggesting that the economic fallout from the U.S. subprime mortgage crisis and the subsequent credit crunch is not limited to the United States.

The Labor Department employment report is due at 1330 GMT on Friday.