Saturday, December 30, 2006

Euro firms after strong euro zone M3 data point to further rate hikes

LONDON (AFX) - The euro was firmer against the dollar after data showed euro zone money supply remains elevated, suggesting that the European Central Bank will continue raising interest rates into next year.

Data out this morning showed euro zone M3 money supply in November jumped at an annual rate of 9.3 pct, well above October's 8.5 pct growth and beating analysts' forecast for a much more modest increase to 8.7 pct.

Average M3 annual growth over the September-November period was 8.8 pct, compared with 8.4 pct in August-October and again above the 8.4 pct growth rate expected. The rate also remains well above the ECB's 4.5 pct year-on-year reference rate for M3.

Calyon analyst Stuart Bennett said the ECB may take some comfort from the detail of the release, which showed that credit growth to residents and the private sector both slowed, but this will not be sufficient to prevent further interest rate hikes in 2007.

"The interest rate hikes are having some impact on the money supply data, but not a sufficiently strong enough one to stop the ECB from continuing to hike," he said.

"This should imply at least two more 25 basis point rate hikes in the first half of 2007, taking the refi rate to 4 pct from 3.5 pct currently and providing support for the euro during the first half of 2007," he said.

Meanwhile, the dollar failed to make much headway after a string of stronger-than-expected US data yesterday, including consumer confidence, existing home sales and Chicago PMI.

Bank of New York currency analyst Michael Woolfolk said there is a "notable lack of follow through dollar-buying following the recent bout of positive US data", but dollar buyers could return when activity picks back up next week.

"It appears that speculative players have decided to join their real money brethren on an extended year-end holiday this week, choosing not to mount another speculative attack of the dollar," he said.

"With activity winding to a close, the dollar is well positioned for some initial dollar buying next week," he added.

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