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Rate Hike for the Eurozone? Traders Think So — But Not Until Summer

Euro coin in front of the giant symbol of the Euro outside the headquarters of the European Central Bank.
Thomas Lohnes | AFP | Getty Images
Euro coin in front of the giant symbol of the Euro outside the headquarters of the European Central Bank.

Ho, hum. Another day, another lift for the euro. Less than 24 hours before Thursday's European Central Bank meeting, traders appear to be banking on hawkish comments from President Jean-Claude Trichet, and the euro has touched a four-month high against the dollar. But what comes after that?

Amelia Bourdeau, senior FX strategist for the Americas for UBS, told me she expects the bank to revise upward its inflation forecast on Thursday, from 1.7% to 2%. If they fall short of that, she said, "It will not be a big problem. I think altogether the message from Trichet will be hawkish."

Don't expect the good times to last, however. Bourdeau thinks short-term investors can trade the euro against the Swiss franc, and look for a move to 1.35, but only for about two weeks. Once the central bank gets into tough decisions about how to deal with troubled peripheral countries later in March, she said, the euro will be buffeted by event risk as news trickles out.

Similarly, Michael Woolfolk, senior currency strategist at BNY Mellon, believes the European Central Bank will raise interest rates in July, which would be a boon to the euro. But investors' focus will likely shift to the ongoing problems at the periphery of the eurozone before then, he says. "This was unfinished business from day one," he told me. Woolfolk favors the approach of requiring eurozone countries to meet strict fiscal criteria, but whatever happens, he says, "Something has to happen."

Remember, too, that part of the euro's strength against the dollar is the result of the dollar's weakness. If the dollar starts to strengthen even as investors start to fret about the European debt crisis, the outlook for the euro could shift quickly.

The bottom line: if you're trading the euro, step lively.

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