Euro Rises to Record Against Yen Before Trichet Speaks on Rates
By Agnes Lovasz and Chris Young
April 12 (Bloomberg) -- The euro rose to a record against the yen and a two-year high versus the dollar on speculation European Central Bank President Jean-Claude Trichet will today say higher interest rates may be needed to curb inflation.
The European currency has gained 5 percent against the yen and 2.1 percent versus the dollar since policy makers last raised borrowing costs on March 8. Since then, traders have increased wagers the fastest economic growth in six years will lead to as many as two more increases this year. The ECB decided at a meeting today to hold its benchmark steady at 3.75 percent.
``If Trichet does prepare the ground for further rate hikes as we expect, the euro will be very well supported,'' said Ian Stannard, currency strategist at BNP Paribas in London. ``European exporters saying they can live with a stronger euro is another encouraging factor.''
The euro rose to $1.3459 as of 7:50 a.m. in New York from $1.3431 late yesterday. It advanced as far as $1.3477, the highest since March 14, 2005. It was also at 160.66 yen after reaching 160.87, the strongest since the European currency's 1999 debut, from 160.36 yesterday.
Stannard said the euro may reach $1.35 today and strengthen further to $1.40 by the middle of the year.
Gains were tempered today by speculation European finance chiefs and central bankers will voice concern about the euro's strength against the yen at a meeting of Group of Seven nations tomorrow in Washington. Japan's Chief Cabinet Secretary Yasuhisa Shiozaki yesterday said officials will discuss currency levels.
The euro's rally against the yen erodes the competitiveness of European manufacturers against rival exporters from Japan.
Group of Seven
``There may be some comments about the currencies that are currently too weak and not really reflecting fundamentals,'' said Kenneth Broux, an economist at Lloyds TSB Bank Plc in London. ``Of course we are talking about the Japanese yen.''
Interest-rate futures indicate an increasing probability that the ECB will raise rates twice more this year after seven increases since late 2005. All 37 economists Bloomberg surveyed predicted today's decision to keep rates on hold.
Trichet speaks after the meeting at 2:30 p.m. in Frankfurt. He said last week that inflation risks from oil prices and wages, and the fastest rate of money-supply growth in 17 years, may warrant ``firm and timely'' action.
The rate on the September interest-rate futures contract has risen 23 basis points since the start of March to 4.26 percent. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB's benchmark rate since 1999.
Exporters Unworried
Anton Boerner, head of Germany's exporter and wholesaler association representing 135,000 companies, said there isn't ``any reason to worry'' about the gains in the euro. He said the currency will go beyond $1.36 and may reach $1.40.
Investors will earn more on so-called carry trades, where they borrow in yen and use the proceeds to buy higher-yielding assets elsewhere, as long as the ECB raises rates faster than the Bank of Japan. The BOJ this week kept its key overnight lending rate at 0.5 percent, the lowest among major economies, and signaled any further increases would be gradual.
``The BOJ will probably raise rates at some point in the second half but it's a long-long way away,'' said Kevin Grice, senior economist at American Express Bank Ltd. in London. ``Carry trades are going to stay in play. Euro-yen is going to go higher.''
The yen has fallen against all 16 most active currencies this month as Japanese investors stepped up purchases of higher- yielding assets abroad for the fiscal year that started April 1.
Japanese Investors
Investors in Japan last week bought the most foreign bonds in five months, a Ministry of Finance report today showed. They bought 614.7 billion yen ($5.2 billion) more overseas debt than they sold in the first week of the fiscal year started April 1.
German five-year government bonds offer a yield premium over similar maturity Japanese debt of 2.90 percentage points, the widest in almost three years.
The carry trade also drove the euro to a record high versus the Swiss franc. The country's benchmark rate of 2.25 percent is the second lowest of major economies behind Japan.
The franc dropped to as low as 1.6453 per euro from 1.6397 yesterday and recently traded at 1.6408.
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