Euro sinks after Trichet signals July rate increase

Dealers will be listening carefully to ECB President Trichet’s words at the post-meeting press conference Thursday for clues over whether the Frenchman is indeed sowing the seeds for a second rate increase in July. And while he did adopt the “magic phrase” hinting that monetary tightening is around the corner, the euro slid in response with rate expectations actually softening during the statement. A lackluster employment report in Australia once again hindered investors’ appetite for the local dollar and vilified the Reserve Bank’s choice of words when it said policy was set appropriately.

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Euro – The ECB left its main interest rate at an unchanged 1.25% at today’s meeting of its governing council. While most onlookers had already ruled out the chance of a monetary tightening today, most onlookers expect Trichet to cast the spotlight on inflation by adopting the phrase “strong vigilance” as a precursor to the second rate increase in three months when it meets in July. The euro was consequently higher on Thursday although fell sharply post-conference as investors nevertheless reined in rate expectations. Short-dated euribor interest rate futures and German bunds advanced sending implied yields lower. The euro at one point reached $1.4646 before sliding to buy $1.4525.

U.S. Dollar – The dollar remains clear of its lowest price during the last two days on an index basis and is weaker by 0.2% on the day at 73.80. Interest rate expectations continue to decline as dealers push out the timing of any possible rate increase. And while that is supposed to be an albatross around the dollar’s neck, the staunch sailor is refusing to buckle in the face of economic adversity just yet. Initial jobless claims for the prior week were revised higher meaning last week’s 1,000 rise to 427,000 first-time claims for benefits was worse than expected and confirming that job seekers are wading through molasses to find work.

Japanese yen – The dollar recovered from a lazy midweek performance against the yen when it dipped beneath ¥80 for the first time since May 5, and on Thursday regrouped back north of the round number. Investors felt less urgency to hold the yen following fresh data showing both indices of the economic watcher survey were far stronger than forecast. The current reading of the economic picture rose to 36.0 from a prior reading of 28.3 while the outlook index rose to 44.9 from 38.4.

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