Euro on solid ground as euro zone GDP speeds up

LONDON - The euro held steady against the dollar and rose versus the yen on Monday as a strong first estimate of second quarter euro zone growth boosted expectations for higher interest rates.

By (Reuters)

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Published: Mon 14 Aug 2006, 7:59 PM

Last updated: Sat 4 Apr 2015, 2:12 PM

The dollar rose to its highest levels in more than two weeks against the yen as robust US retail sales data last week fanned expectations the Federal Reserve might resume raising interest rates soon.

The euro zone economy grew at its fastest rate in six years in the second quarter against the previous three months, data showed on Monday, beating market expectations and reinforcing views that the European Central Bank would raise rates again after a 25 basis point hike earlier this month.

Individual country data showed the German economy grew at its fastest rate in over five years in the second quarter, while growth in France was at its fastest pace in almost six years.

“The market is not fully priced yet for (an) October (hike), but the data has been pretty solid and the fact that the ECB has now upped the ante to a two-month spacing (between hikes) suggests they will probably do that going forward,” Westpac currency strategist Geoff Kendrick said.

Investors expect the ECB to raise interest rates once or twice more this year after it increased them to 3 percent in August.

By 1148 GMT, the euro was steady against the dollar at $1.2720, while the dollar was up a quarter percent to 116.59 yen.

The euro was up around 0.3 percent at 148.35 yen after hitting a record high around 148.60 last week, according to Reuters data.

Yen falls

The yen was under pressure across the board, hitting an 8-year low against sterling, as expectations rose that the Bank of Japan will keep interest rates relatively low at a time other major central banks are tightening.

“Basically the yen is a currency that will remain under pressure. In the end even though the BOJ is raising rates, most other central banks are tightening even faster so yield differentials will become more negative as time goes by,” said Johan Javeus, currency strategist at SEB in Stockholm.

The dollar meanwhile was finding background support after last week’s strong retail sales data set the stage for a strong showing on consumer price index numbers on Wednesday.

“We may be able to live with a stronger headline CPI, but if core CPI comes in above expectations then I think it will make the Fed’s life very difficult in the run up to the September meeting,” CIBC World Markets European economist Audrey Childe-Freeman said.

Last week, the Fed left interest rates on hold at 5.25 percent after raising them 17 straight times, though it kept the door open for more credit tightening if price pressures persist.

The futures market is attaching around a 38 percent probability for a September rate hike.

Earlier on Monday, currency trading at some Japanese banks in Tokyo came to a temporary halt after power outages in large areas of the city caused computer systems to go down, dealers said.

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