26 April 2004, 11:57  Dollar hits 5-month top vs euro on rate outlook

The dollar hit a five-month high against the euro on Monday after Group of Seven (G7) nations showed no change in their currency views at a weekend meeting and markets eyed chances for U.S. interest rate rises. The communique issued by G7 finance ministers and central bankers after their meeting on Saturday repeated verbatim the language used at the end of their previous meeting in February, confirming market expectations. But speculation of a U.S. rate rise in coming months, coupled with talk of renewed pressure on the European Central Bank to lower euro zone borrowing costs, helped the dollar extend recent gains versus the single currency. "The G7 did not really have any major implications as far as foreign exchange is concerned. The general feeling is that G7 countries are reasonably happy with fx moves," said Adam Cole, senior currency strategist at Credit Agricole Indosuez in London. "The interest rate outlook from both sides (U.S. and euro zone) is the primary focus after strong economic news from the U.S. last week. There is a feeling a rate hike is fairly imminent."
By 0730 GMT the dollar rose to $1.1760 per euro , its highest level since late November, gaining nearly half a percent from last week's closing levels. It also hit a five-month high against the Swiss franc at 1.3225 . Expectations of euro zone rate cuts in the near-term could increase following the 0800 GMT release of the German Ifo institute's closely-watched business climate index, which is expected to fall for the third month running in April. Economists' forecasts for the headline index range from 94.4 to 96.0, compared with 95.4 in March, while the median forecast is at 95.1.
INTEREST RATES CONVERGING
After the G7 meeting, ECB President Jean-Claude Trichet took a stance well rehearsed in recent weeks, saying the central bank had no policy bias and that all options were open on what to do with rates. But a European Union source said German Finance Minister Hans Eichel and French Finance Minister Nicolas Sarkozy had urged the ECB at the G7 meeting to cut rates to boost growth. "The conflict between the ECB and euro zone finance ministers is a small negative," said Cole. "Today the focus is on the Ifo and we see risks to the downside." Last month, the Ifo index failed to meet analysts' forecasts. Its fall prompted the influential institute's chief to urge the ECB to throw a lifeline to the struggling German economy by cutting rates. The ECB's key rate stands at two percent, while the U.S Federal Reserve's main rate is at one percent. The dollar was capped versus the Japanese currency, trading around 108.94 yen , hardly changed from late Friday levels. Blocking the dollar for now was a considerable amount of selling by Japanese exporters ahead of a succession of national holidays, known as Golden Week, that start on Thursday. But some traders said the dollar could revisit its five-month high above 112 yen hit last month, carrying over recent strength. "I think the dollar has hit a bottom and that it will rise in the longer term," said Mitsuo Imaizumi, deputy general manager of the international bond and forex department at Daiwa Securities SMBC. "But given that there are those who still think dollar/yen will go under 100 yen, we could see some range-bound trading around 110 yen for while."
U.S. releases in the near-term include new home sales due later on Monday, the Conference Board's consumer confidence survey on Tuesday, and the keenly-awaited gross domestic product (GDP) figures for the January-March quarter due on Thursday. Analysts expect to see GDP up five percent on an annualised basis, compared with 4.1 percent in the previous quarter. Also on Monday, Federal Reserve Board Governors Mark Olson and Susan Schmidt Bies speak at 1400 and 1500 GMT, respectively. Federal Reserve Bank of Chicago President Michael Moskow speaks at 1510 GMT. ECB President Jean-Claude Trichet speaks at 1630 GMT and ECB Executive Board member Otmar Issing is due to give a lecture at 2115 GMT.////

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