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Euro firms on rate hike expectations

LONDON - The euro firmed against the dollar Monday as record high eurozone inflation boosted expectations the European Central Bank would raise interest rates next month.

The single European currency in late-day trade was at 1.5471 dollars after 1.5384 late Friday.

The dollar was meanwhile at 108.23 yen, up from 105.15 on Friday.

The euro was supported by news that inflation in the 15-nation eurozone hit a record 3.7 percent in May, driven by soaring oil and food prices to the highest level since the single European currency was launched in 1999.

The rate, revised up from a first estimate of 3.6 percent, marked a sharp pick-up in 12-month inflation from April, when consumer prices in the eurozone rose 3.3 percent.

"It's going up. It's not a good figure. Inflation is our main concern (as) regards the economy at the moment," said Amelia Torres, the European Commission's spokeswoman on economic and monetary affairs.

Investors were increasingly convinced the ECB at its July 3 meeting will raise its benchmark interest rate, a move signalled earlier this month by ECB head Jean-Claude Trichet in the face of mounting inflation pressure.

"The ECB seems set to pull the interest rate trigger and lift rates from 4.00 percent to 4.25 at its July 3 meeting," said Howard Archer of Global Insight.

Added ING analyst Carsten Brzeski: "High oil and food prices are already clearly denting any hopes for a pick-up in private consumption but only a severe deterioration in economic confidence indicators might prevent the ECB from pulling the rate trigger at the next rate-setting meeting."

The euro had gotten off to a sluggish start earlier in the day as Group of Eight finance ministers meeting in Japan steered clear of currency issues in their final communique.

The statement focused instead on slowing economic growth and rising oil prices, disappointing some investors who had been looking for specific comments on the weak dollar and a hint that intervention in the foreign exchange markets was a possibility.

In the run-up to the meeting, US Treasury Secretary Henry Paulson said the dollar needed to appreciate but Japanese Finance Minister Fukushiro Nukaga said no discussion of currency policy took place.

"The G8 June communique was a major disappointment for dollar bulls who were looking for further confirmation of recent US official comments on the currency," said Callum Henderson, head of forex strategy at Standard Chartered.

But the dollar did win some support on a report that Saudi Arabia would raise oil production in July by 200,000 barrels a day.

"The decision by Saudi Arabia to raise production in July has provided a supportive tone for the dollar," said analysts at BNP Paribas.

Elsewhere, the pound remained well bid despite a gloomy economic outlook from the CBI business lobby which predicted that British growth in 2009 would slow to its lowest pace since 1992.

In London Monday, the euro changed hands at 1.5471 dollars against 1.5384 late on Friday, at 167.40 yen (166.38), 0.7879 pounds (0.7894) and 1.6150 Swiss francs (1.6101).

The dollar stood at 108.23 yen (108.15) and 1.0440 Swiss francs (1.0460).

The pound was at 1.9636 dollars (1.9481).

On the London Bullion Market, the price of gold firmed to 888.25 dollars per ounce at the fixing from 866 dollars late on Friday.