Euro reaches all-time high against Japanese yen

LONDON (AFX) - The euro forged ahead to reach a new all-time high against the Japanese yen this morning, touching the 158 yen level, where large offers put a halt to its progression.

Economists said the yen has been failing to enjoy any support from expectations that the Bank of Japan will deliver a rate hike this year, as traders seem to believe borrowing costs are not destined to rise much more after that.

'Prospects for low long-term rates in Japan remains a compelling argument for yen outflows,' said Russell Bloom at IFR Markets.

'European traders have been keen to exploit this theme early on in the year.'

The morning rally was helped by a larger-than-expected fall in German unemployment. German adjusted unemployment fell by 108,000 in December, against expectations for a 45,000 decrease, and supporting views that European rates will be heading higher.

'The European Central Bank (other-otc: CHPA.PK - news - people ) remains on course to hike the refi rate at least twice more in the first half of 2007, taking it to 4.0 pct from its current 3.5 pct,' said Stuart Bennett at Calyon, adding that it supports a strategy for more euro gains against the dollar, targeting 1.3560.

The dollar, however, has remained well-bid against the euro this morning, with economists attributing the move to trading flows and profit-taking ahead of a string of key US data today.

The ISM manufacturing index, the ADP employment index, vehicle sales, construction spending and the minutes from the Federal Reserve's last policy meeting are all due today.

'There is some room for surprises from the Fed minutes,' which has continued to cite upside risks to inflation despite a slowing economy, said Simon Derrick at Bank of New York (nyse: BK - news - people ).

Overall, however, the dollar is bound to be outshone by the euro and the pound, analysts said.

'Once we find ourselves in more normal trading conditions, maybe towards the end of the week, the euro will continue to share centre stage with the pound,' Derrick said.

The pound remained supported by economic data which has surprised to the upside over the past month, fuelling views that the Bank of England may raise rates at its February meeting.

Although it gained ground against the yen, the markets nevertheless saw some profit-taking against the dollar, bringing the pair down from the 1.9700 level towards 1.9666.

A Volatile Week to Come

After a month of consolidation, much volatility is expected for the first week of 2007 on the back of a economic release scheduled with important indicators every day. The US calendar will start will ISM manufacturing index on Tuesday. This manufacturing index has dropped for the fourth consecutive month in Nov and reached a sub-50 contraction level of 49.5 for the first time since 2003. A rebound is expected by economists to push this index back to expansionary level 50 and end the losing streak. Tuesday will also be a manufacturing day featuring Manufacturing PMI indices from Germany, Eurozone and UK.

The highly anticipated release of Fed Minutes was rescheduled to Wednesday. Focus will be, again, on Fed's view on growth and inflation, in particular, after further indication of slow down in housing and manufacturing industries and tamed inflation data. Markets are expecting the Fed to hold steady in first quarter but such expectation could easily flip to rate cut in case of a dovish minutes from the Fed.

ISM non-manufacturing index will be featured on Thursday, which is expected to retreat mildly to 57.0 after scoring a surprise 58.9 in Nov. Such reading, together with a rebound in the manufacturing index, will suggest that those the pace of the economy in US has slowed, it's still steady and will reduce the odd that Fed will cut rate soon. Thursday will also feature services PMI indices from Germany, Eurozone and UK. Plus Canadian PPI.

Non-Farm payroll will be featured on Friday. Consensus call for a mild drop in job growth to 115k in Dec, with unemployment rate remains at 4.5%. Again, focus will also be in revisions to prior data as well as other indicators including wages. Also, Eurozone PPI and retail sales will be released.

In short, we'll be having a busy week with highly market moving economic releases every day. Prepare for a roller coaster ride!

Wish our readers a prosperous and profitable 2007!

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.

Dollar steadies after data shows US economy stable

By Rika Otsuka

TOKYO, Dec 29 (Reuters) - The dollar steadied on Friday after paring losses against the euro in the previous session on a raft of data that showed the U.S. economy may be in better shape than earlier thought.

The U.S. currency has been unable to shake off market expectations in the past few months that the slowing economy could force the Federal Reserve to start cutting interest rates next year.

The dollar fell on Thursday after Yves Mersch, a member of the European Central Bank Governing Council, said euro zone rates remain low in historical terms, highlighting the risk that the dollar's rate advantage could narrow further.

Stronger-than-expected monthly readings for existing home sales, consumer confidence and the Chicago manufacturing index helped the dollar to trim losses against the euro on Thursday.

"It is rather puzzling that market participants are not buying the dollar much despite the strong data," said a trader at a big Japanese bank.

"Players are staying bearish on the currency," he added.

The euro edged up to $1.3162 by 0500 GMT from $1.3150 in late U.S. trading on Thursday.

The dollar was steady at 118.91 yen , little changed from late New York trade on Thursday. It stayed in sight of a two-month peak of 119.23 yen marked on Tuesday.

The euro edged up to 156.54 yen , near a record high of 156.73 yen hit on Thursday.

Market activity in Tokyo was subdued on Friday, after many Japanese companies finished this year's business on Thursday, traders said.

No major economic indicators are due from Japan or the United States, while Germany's GfK consumer sentiment survey for January will be released at 0700 GMT.

Bond and stock markets in Japan were open for a half-day on Friday and will resume trading on Thursday, Jan. 4.

HIGH-YIELDERS BENEFIT

Expectations that the ECB will further boost rates next year from the current 3.5 percent helped the euro to find favour.

"It is easy for investors to chase the euro as it is clear that the currency's yield will continue to rise," said Nobuo Ibaraki, forex manager at Nomura Trust and Banking.

The euro has risen 11 percent against the dollar and 12 percent versus the yen this year, aided by stagnating rates in the United States since mid-year and prospects for only a gradual rise in Japanese rates from the current 0.25 percent.

Despite expectations that the Bank of Japan will bump rates up to 0.5 percent before the end of March, few in the market believe the yen's yield disadvantage will shrink quickly.

Investors' demand for higher-yielding currencies buoyed the Australian and New Zealand dollars on Friday.

The Aussie struck a fresh 9-1/2-year high against the yen , while the kiwi scaled a one-year peak against the yen and matched a one-year high versus the dollar hit on Thursday.

Sterling hovered close to eight-year highs against the yen .

Expectations in the market that the Bank of England may push rates higher in 2007 has helped sterling climb 14 percent against the dollar this year.

A spike in the Chinese yuan that appeared to bring it to par with the Hong Kong dollar on Friday was in fact a mistyped price quotation, an official with the China Foreign Exchange Trading System said.

Earlier, the price quote had indicated that the Chinese yuan had reached parity with the Hong Kong dollar for the first time since 1992.

Dollar retreats in holiday thinned-trading

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 27 (Reuters) - The dollar weakened on Wednesday in light post-Christmas trading as a weak housing industry data added to the perception of a U.S. economic slowdown.

Investors focused on the diverging interest rates outlook between the euro zone and United States, where fresh economic reports of a sluggish economy tend to reinforce expectations of of interest rate cuts next year in the world's largest economy.

The euro rose 0.4 percent against the dollar to $1.3147 . The dollar was flat against the Swiss franc at 1.2224 francs . Sterling, meanwhile, was up 0.3 percent at $1.9591 .

Reports that the United Arab Emirates' has decided to increase the proportion of its euro reserves over the next few months may have also weighed on the dollar, analysts said.

"All in all, it's not looking to be a positive backrop for the dollar," said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

Osborne cited Tuesday's weak numbers for both Richmond and Dallas Federal Reserve manufacturing surveys including a report on Wednesday showing a sharp fall in U.S. mortgage applications.

The Mortgage Bankers Association said U.S. mortgage applications plummeted last week to the lowest level in nearly five months, dragged down by a plunge in demand for home refinancing loans. For more click on [ID:nNAT002350].

Data on November's new home sales due at 10 a.m. (1500 GMT) is seen as a key in determining if and when the Fed would begin cutting interest rates.

"So we've got the two bugbears of the dollar -- housing and manufacturing -- which are not flashing very positive signals at the moment," said Osborne.

The euro, on the other hand, continued to rack up gains, with the European Central Bank expected to raise interest rates further next year from the current 3.5 percent.

The single currency earlier hit a 6-1/2 year high versus the Swiss franc at 1.6083 , buoyed by expectations that euro zone interest rates are set to rise further in 2007. By contrast, the Swiss National Bank slashed its 2007 interest rate outlook after raising rates earlier this month.

Against the yen, the dollar fell 0.6 percent to 118.41 yen , after Jiji news agency reported late on Tuesday that the Bank of Japan is likely to discuss raising rates to 0.5 percent next month.

Jiji, citing no sources, added that the decision could be postponed to February or later in the event of anything unexpected happening in financial markets.

"There was a bit of a turn in the yen that may have been the catalyst for more dollar weakness," said Daragh Maher, currency strategist at Calyon.

However, a trader at Forex.com in Bedminster, New Jersey doubted this report. "We believe this to be highly unlikely as far as event risk, but, the revaluation of the Chinese yuan is a real event," he said.