12 May 2006, 13:44  Euro spikes higher ahead of US trade data

The euro reached fresh year highs against the dollar as the market awaited key US trade data and as speculation gathered pace that the European Central Bank could hike rates by 50 basis points next month rather than just 25. The dollar fell sharply yesterday after poor retail sales numbers cast doubts over whether the Federal Reserve will raise interest rates any further. Today, focus is likely to switch to concern over structural imbalances, with trade data expected to show a sizeable deterioration in the US trade deficit. "The market is clearly champing at the bit to sell the dollar on 'imbalances' and a poor trade number would only pour fuel on the fire," said Steve Pearson at HBOS. Earlier today, the euro briefly rose above the 1.29 usd mark for the first time in over a year, while the yen also benefited, breaking below 110 per dollar for the first time in over eight months. The consensus forecast is for today's data to show the trade deficit deteriorated to around 67 bln usd in March, and the dollar is unlikely to see much support unless the number beats February's improvement to 65.7 bln usd, he added. Meanwhile, the euro garnered support of its own as comments by European Central Bank board member Nout Wellink suggested that euro zone rate setters may be contemplating a 50 basis point hike next month. Wellink told a press conference yesterday that euro zone rates are too low and said a 50 basis point hike was "very normal". "Although a rate hike in June is all but guaranteed, markets are left pondering the size of the move following recent comments by some ECB members," said Mitul Kotecha at CALYON.

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