Currencies

Friday May 9, 01:30 PM
Forex - Euro firms as markets mull interest rate outlook, pound slips further

LONDON (Thomson Financial) - The euro remained firm against the dollar despite the release of a downbeat lending survey from the European Central Bank, as investors scaled back their expectations for when interest rates in the 15-nation currency zone will be cut.

The ECB Lending Survey indicated that the previously strong levels of lending to the household and corporate sectors are starting to fall. This is likely to add to fears that euro zone economic growth is set to slow noticeably in the coming years and could go someway to easing the ECB's inflation concerns.

'The ECB's lending survey published today shows a further progression of the credit crunch,' said UBS (Virt-X: UBSN.VX - news) currency strategist Benedikt Germanier, adding that with the U.S. economy starting to recover the euro looks set to weaken against the dollar in the medium term.

For now, however, the euro has maintained most of the strong gains it posted made yesterday and overnight as investors questioned just how soon the ECB will cut interest rates.

The ECB's decision to leave rates unchanged at 4.00 percent yesterday was widely expected, but many markets watchers were anticipating the central bank would acknowledge the risks of an economic slowdown had accelerated.

However ECB president Jean-Claude Trichet stuck to his guns, emphasising that preventing a prolonged period of high inflation remained the bank's primary concern.

'There was the slightest of chances Trichet would acknowledge the softening of economic data - in the event he offered few crumbs here and in discussing inflation he even removed references to it being temporary,' said Gavin Friend, currency strategist at Commerzbank (Xetra: 803200 - news) .

The euro has weakened against the dollar in recent weeks as investors betted that while the U.S. Federal Reserve is on the verge of ending a rate-cutting series the ECB is about to start one.

However Trichet's hawkish tone yesterday dashed any hopes that this was set to come anytime soon and unsettled markets' interest rate outlooks.

'Trichet's apparent intransigence has ruffled a market that had become short euro in a relatively brief period of time, and the shake-out could see the euro move higher against the dollar,' said Daragh Maher, currency strategist at Calyon.

The only major data out this afternoon is U.S. trade figures for March, but analysts said markets are unlikely to react, waiting instead for next Tuesday's retails sales reports.

Elsewhere the pound continued to weaken following a dismal set of home repossession figures and as high yielding currencies fell victim to a renewed bout of risk aversion.

The Ministry of Justice said court orders for repossession were up an annual 17 percent in the first three months of the year, and up 9 percent on the fourth quarter of 2007.

While the figures effect just a small proportion of United Kingdom homeowners, analysts said the figures are only going to get worse, spelling trouble for the rest of the economy.

'The financial pressure on many home owners is increasing, and it seems certain that repossessions will trend up appreciably over the coming months, particularly if the economy suffers an extended marked slowdown and unemployment starts rising, which seems likely,' said Howard Archer at Global Insight.

Meanwhile risk aversion crept back in to financial markets following another record high for oil prices and poor set of results from U.S. insurance giant AIG.

Steve Pearson, currency strategist at HBOS (LSE: HBOS.L - news) , said equity markets are showing signs that they could be entering another period of pro-longed weakness, which will provide ongoing support for the safe-haven Japanese yen.

'The major equity indices are struggling to push much beyond a 50 percent retracement of the initial November (Frankfurt: A0S9N7 - news) to March sell-off and are now entering what looks, on the basis of previous equity bear market experience, the most likely timeframe for a second leg down,' he said.

'Reflecting this the yen has started to gain traction, with some weakness evident in relatively high yielding and emerging market currencies,' he added.

London 1305 GMT London 0849 GMT

U.S. dollar

yen 102.77 down from 103.07

Swiss franc 1.0401 down from 1.0422

Euro

U.S. dollar 1.5455 down from 1.5460

yen 158.88 down from 159.44

Swiss franc 1.6082 down from 1.6152

pound 0.7936 up from 0.7912

Pound

U.S. dollar 1.9474 down from 1.9532

yen 200.15 down from 201.44