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FOREX-Euro stays firm after euro zone inflation edges higher

Jessica Mortimer
Friday, 29 Nov 2013 | 8:10 AM ET

* Euro hits 5-year high versus yen, 1-mth high vs dollar

* Euro zone inflation rises, slightly above forecast

* Eases concerns about imminent ECB easing measures

* Yen stays weak, hit 6-month low versus dollar

LONDON, Nov 29 (Reuters) - The euro traded near a five-year peak against the yen and a one-month high against the dollar on Friday after euro zone inflation data eased concerns about deflationary pressures in the region.

Annual euro zone consumer price inflation rose by 0.9 percent in November, slightly more than economists had predicted, while further data revealed the first fall in euro zone unemployment in almost three years.

Analysts said this should be sufficient to ease the European Central Bank's concerns about low inflation and may cause them to hold off from a further interest rate cut as early as next week to follow the unexpected rate cut earlier this month.

"The data shows that from the inflation side there is no urgency for the ECB to do more ... This is justifying the high euro levels we are seeing right now," said Ulrich Leuchtmann, head of currency research at Commerzbank in Frankfurt.

He said the euro may rise a little further but any gains would be limited before the ECB policy decision and news conference by President Mario Draghi next week. He expected the euro to stabilise at $1.35-$1.36 into year-end.

The euro was last up 0.1 percent at $1.3611, near an earlier one-month high of $1.3622.

Against the yen, the euro was up 0.1 percent at 139.23 yen, having earlier risen as high as 139.705 yen, its strongest since the aftermath of the Lehman Brothers' collapse in late 2008.

Traders said they expected the euro to face stiff chart resistance on the approach to the psychological 140 yen level.

However, the yen was expected to continue to weaken on expectations of loose monetary policy in Japan. By contrast, the U.S. Federal Reserve is expected to begin reducing its stimulus, most likely early next year.

"The downtrend in the yen is definitely still in place ... It is difficult to see why people would be buying the yen, unless there is risk aversion and lower equity markets," said Niels Christensen, currency strategist at Nordea in Copenhagen.

The euro was up nearly 22 percent on the year against the yen. It has risen around 6.5 percent since the ECB unexpectedly cut interest rates on Nov. 7.

A Reuters poll on Friday showed Japanese fund managers in November raised their euro zone bond weightings to their highest level since March 2011.

The dollar also hit a six-month high against the yen of 102.61 yen. It was last steady at 102.30 yen.

Japan's core consumer inflation accelerated to a five-year high of 0.9 percent in October, adding to evidence that it is beating deflation. But this still left Japan with a long way to reach its inflation target of 2 percent, suggesting the BOJ may need to ease policy again next year.

"Dollar/yen can go higher ... Japan needs a trend of a weakening yen," Commerzbank's Leuchtmann said.

Sterling rose to an 11-month high of $1.6375 against the dollar and a five-year peak against the yen after the Bank of England unexpectedly scaled back housing sector stimulus on Thursday.

Traders took the move as confirmation of the BoE's confidence in the economic outlook and of their expectations that the BoE was moving closer to raising interest rates.

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