11.06.2008 14:44

European focus: euro is suppirted with ECB rate hike expectations

The euro snapped a two-day decline against the dollar on growing speculation the European Central Bank will raise interest rates next month while the Federal Reserve leaves borrowing costs unchanged.

The 15-nation currency also traded near a seven-month high against the yen after ECB Executive Board Member Juergen Stark said the markets understood the bank's signal to raise borrowing costs next month. The yen fell as rising stocks fueled demand for purchases of higher-yielding currencies funded in Japan.

The dollar strengthened against the yen on speculation Federal Reserve officials speaking today will highlight the risks of inflation. Fed Board Vice Chairman Donald Kohn and Fed Bank of St. Louis President Jim Bullard are scheduled to deliver speeches.
Futures on the Chicago Board of Trade showed a 58 percent chance yesterday the Fed will raise its 2 percent target rate for overnight lending between banks by at least a quarter point at its Aug. 5 meeting, compared with 32 percent the previous day. The contracts showed a 96 percent chance the Fed will increase the rate by December, up from 60 percent odds a week ago. Bank of America Corp. lowered its forecast for the yen because the Bank of Japan will probably maintain a neutral stance on interest rates while U.S. and European policy makers signal increases.
The yen is also likely to weaken as stock-market gains show investors' risk appetite is improving, said Tomoko Fujii, head of economics and strategy for Japan at the bank, the second- largest in U.S. The yen will fall to 108 per dollar by Sept. 30 versus a previous forecast of 105, according to the report.
Gains in the dollar may be limited as the Fed releases its so-called beige book report, a survey of regional economic performance, at 2 p.m. in Washington today. Nine of 12 Fed districts said conditions weakened in the April 16 report.