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Euro Extends Gains vs. Dollar on Trichet Comments

Reuters
Thursday, 10 Jan 2008 | 10:24 AM ET

The euro climbed across the board Thursday, after European Central Bank President Jean Claude-Trichet flagged more interest rate increases in the euro zone, citing lingering inflation pressures.

Trichet also cautioned that economic growth in the region could slow, although in a question and answer forum following his prepared remarks, the ECB chief indicated that the bank was maintaining a tightening bias. That further pulled the euro higher.

"Trichet is definitely hawkish. Markets were expecting him to say that the ECB would be on the sidelines for now," said Rafael Martorell, chief dealer at BNP Paribas in New York.

"A lot in the market were caught short euros, and when Trichet came out more hawkish than expected, they had to cover their short positions," he added.

The euro gained against the dollar.

Martorell thinks, however, that the euro's gains could be capped at $1.4750, as a run of weak numbers suggested that the euro zone economy is not all that robust.

The single currency also rose against the yen, while euro/sterling rose to a fresh record high above 75.30 pence.

Trichet, in his speech, said he expects the annual harmonized inflation rate to remain significantly above 2 percent amid stronger-than-expected wage growth.

Earlier in the session, the ECB held its key interest rate steady at 4 percent, as expected.

Also on Thursday, the Bank of England left rates on hold at 5.50 percent, giving sterling an initial boost, although its gains were limited. Markets continued to fret about Britain's slowing economy.

The pound was up on the day.

Markets now turn their focus to a speech by Federal Reserve Chairman Ben Bernanke later in the session. It will be Bernanke's first public remarks on the economy this year.

In Bernanke's speech, investors will be looking for clues on whether the Fed is preparing to cut rates by 50 basis points at the end of the month or whether it thinks 25 basis points would be enough.

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