Reuters, Friday June 6 2008 By Simon Falush
LONDON, June 6 (Reuters) - The European Central Bank’s shock message that interest rates could rise soon has sparked a rally in the euro and could push it to fresh record highs against the dollar as investors reassess the outlook for euro zone yields.
The ECB held rates at 4 percent on Thursday, but kicked the door wide open to a rise as soon as next month. This would increase the rate advantage the euro holds against the dollar, whose rate has fallen to 2 percent following an aggressive policy easing campaign by the Federal Reserve.
Analysts say that escalating speculation of such a move by the ECB may prompt traders to cut bets on the dollar made earlier this week after comments from Fed Chairman Ben Bernanke highlighting inflation risks bolstered the view that U.S. rate cuts have ended.
The unexpectedly hawkish commentary from ECB chief Jean-Claude Trichet on Thursday will likely cause investors to move back into the euro, which has retreated from a record high of $1.6018 set in April.
“Institutional investors are now significantly long U.S. dollars as they anticipated the rate differential moving in favour of the dollar,” said Michael Metcalfe, senior strategist at State Street.
"My worry is that this surprise move from Trichet shows institutional investors may have things the wrong way around, and that a rate rise from the ECB may cause them to unravel dollar longs."
He said if the market’s focus returns to concern about the extent of inflationary pressure rather than dipping growth, this could lead the euro to race as high as $1.65 after a rate rise from the ECB.
Trichet’s comments have put the prospect of higher euro zone rates at the front of investors’ minds as it would be giving the single currency the boost of a growing yield advantage over the dollar.
“As long as European data is not screamingly bad the debate about the timing of rate hikes will be on the front burner which will be a catalyst for euro strength,” said Simon Derrick, senior currency strategist at Bank of New York Mellon.
He said he sees a possibility the euro will reach new record highs against the dollar above $1.60 over the summer but thinks it will perform even better against the pound reaching around 82-83 pence with the Bank of England likely to cut rates.
Trichet’s comments snuffed out a brief bout of dollar resurgence against the euro which was triggered after Bernanke said that inflation expectations were a significant concern for Fed policymakers and a weak dollar was adding to price pressures.
The ECB flagging a policy that is likely to put downward pressure on the greenback signals a departure from a more coordinated stance in the past among major central banks against dollar weakness.
However, some analysts think the dollar’s slide will be limited by a return to a more cohesive message on the dangers of dollar weakness from finance officials when they meet later in the month.
“I do not think, despite the widening in spreads with the U.S., that euro/dollar is going to make new highs,” said Nick Parsons, head of market strategy at nabCapital.
“I think going into the G7 finance ministers’ meeting there will be a sustained effort on the part of the politicians and finance ministers to be talking down the euro/dollar.” (Editing by Malcolm Whittaker)
It looks like fundamentals could be throwing technical analysis out the window on this pair temporarily. Based on ta and Uncle Ben I have placed some swing shorts on euro at current level.
This pair already gave me a good kick in the butt just a few days ago. I hope I am not in for another round of butt kicking.
This next week will let me know to cut and run at a loss or hang on and cash in.
I am betting the first hype of news is already priced in after the two day rally. Many dollar longs were forced to cover which spiked this pair even more.
If we are headed back up and going to blow past 1.60, maybe we will see a pullback after these two big rallies because I doubt if it will just go straight up on an event that is a month away.
Wouldn’t it be funny if the euro went all the way past 1.60 with bad data releases the whole way then the ECB said they are going to hold. The euro bull will be jumping off the top floor ledge if so.
What is your guy’s take, if any?
I would buy on any significant pullback and be vigilant … I agree euro could go back to test 1.60+ but I do not think much beyond and when it falls again, it will be much more dramatic than the last time.
I look for the EUR to blow past 1.60 in the short term (2-3 weeks) and then after a small pull back to surpass 1.65 before the end of summer. I agree with 4X, buy the dips and ride the wave up.
Europe is catching the economic flu that the US has been suffering with recently but our fundamentals are so much worse, I see the EUR faring much better than the USD in the long term.
“It looks like fundamentals could be throwing technical analysis out the window on this pair temporarily.”
…how so m2p? (easy shorthand!)
Long-term trend has been up for years now, and the recent few weeks has only seen a bit of ranging and a pause rather than break in the trend. You may be guessed… I’m long EURUSD, have been for ages.
You are most likely right. It look like we were going to change directions for the long term but maybe not.
1: The worst for US is over. ( Well maybe not, it’s now getting worse)
2: When the US sneezes, the rest of the world catches a cold. (hmmm, seems like they just got a bug, and we are on the death bed)
Yep - I believe the problems are severe for the US, but you’re right, the rest of the world won’t get out unscathed. It’s just a timing issue - I reckon it’ll take a few more months yet, maybe even end of the year before Euro really suffers like the dollar (and so reverses trend). At the moment, the Europeans have more of a snotty tissue than full blown flu 
That said, I’m fickle. If the charts prove me wrong (like a break of 1.53 or so at the moment) I’ll happily change my mind faster than you can say “short”.
"Europeans are concerned about the dollar’s weakness and have urged the Bush administration to speak up more forcefully in defense of the U.S. currency.
Since oil is priced in dollars, Europeans blame some of their inflation pressures on the dollar’s weakening value and fear the cheap dollar will make their products more expensive in U.S. consumer markets."
A clip from an article:
By Tabassum Zakaria
WASHINGTON, June 9 (Reuters)
It looks like 1.6 and above may be bad for Europe too. They have complained before around the 1.6 mark.
Well I should have gone with my charts, my short euro would have cashed in nice. Instead, I killed it off at a small loss to long guppy and very glad that I did.
i don’t think the euro will reach 1.60. My best guess is the ECB was selling the euro like crazy when the pair broke above the 1.60 level, and I see the same think happening again if the pair approaches.
I don’t exlcude either some verbal interventions