Forex TV GLOBAL NEWS FOREX NEWS & ANALYSIS http://www.forextv.com/FT/AFX/ShowStory.jsp?seq=202361 Forex - Euro rises as ECB signals it is not done hiking rates 02/08/07 05:41 pm (GMT) LONDON (AFX) - The euro was broadly higher after the European Central Bank signalled it is not done hiking rates despite today's no change verdict, as expected. Comments from ECB president Jean-Claude Trichet were widely taken to signal that a rate increase to 3.75 pct is likely next month, and possibly to 4 pct by year end. The base rate is currently at 3.50 pct, having risen rapidly from as low as 2.00 pct late in 2005. Traders began selling euros as the ECB announced its decision to hold rates, but this quickly reversed as Trichet's press conference began. Stuart Bennett, senior European economist at Calyon, said Trichet's use of the words 'strongly vigilant' was key. "Immediately as Trichet used the words 'strongly vigilant' we saw the euro spike over 1.30 against the dollar," he said. Trichet said recent economic data "has also confirmed that strong vigilance remains of the essence so as to ensure that risks to price stability over the medium term do not materialise." Michael Woolfolk at Bank of New York pointed out that the ECB means business and appears genuinely concerned about threats to price stability in the second half of 2007, particularly through higher wages. "Increasingly hawkish language in both the press statement and Trichet's comments today created expectations of additional ECB rate hikes during the second half of the year even after the removal of monetary accommodation has been completed," he said. Over in the UK, the Bank of England left its benchmark rate unchanged at a five-and-a-half year high of 5.25 pct. The decision, though widely expected,disappointed some sections of the market. Analysts noted that the market had been pricing in a slim chance of a rate hike today, so the decision to leave rates on hold weakened the pound. "The market had been priced for a 1-in-4 chance of a hike today, so the inaction will force some modest downward adjustment to near-term rate expectations and by extension may put the pound under some downward pressure," said Daragh Maher at CALYON. "Nonetheless, with the economy still powering ahead and inflation well above target, we would expect the BoE to tighten rates further during second quarter of 2007, most likely at the May meeting," he added. Markets believe a hike to 5.50 pct will come this spring. Elsewhere, the yen stayed on the back foot ahead of the G7 meeting this weekend where its weakness is likely to be a contentious topic. The latest salvo in the war of words between the Europeans and the Japanese came from Bank of Japan (BOJ) rate setter, Hidehiko Haru, who said pointedly that inflation is hardly a concern in his country and that policy adjustment will take place gradually. Most analysts acknowledge that the Japanese central bank has been right to err on the side of caution as domestic consumption in the world's second biggest economy remains sluggish. The Europeans, however, believe the yen is undervalued. At the heart of their argument is the phenomenon of carry trades which rely on the the near zero level of interest rates in Japan. Carry trades occur when traders borrow in low yielding currencies such as the yen and Swiss franc to invest elsewhere where interest rates are higher. European politicians, including German Finance Minister Peer Steinbruck, have made public their intentions to discuss the yen's weakness at the weekend's pow wow of the world's biggest economies. Japanese officials, meanwhile, say the yen only be part of 'routine' discussions. There had been some reduction in carry trades ahead of the G7 meeting and the possibility that the yen will feature high up on the agenda. But the jitters appear to be subsiding. BNP Paribas analysts believe the G7 may discuss forex markets, but will stop short of calling the the yen 'manipulated' or 'undervalued'. They see the G7 expressing concerns regarding the size of carry trades and the potential deflationary effect should the carry trade implode, they said, however. "If the G7 talks about these issues and communicates the discussion to markets the yen will move higher and not lower, as the consensus currently expects," they added. London 1651 GMT London 1315 GMT US dollar yen 121.16 dn from 121.39 sfr 1.2477 dn from 1.2497 Euro usd 1.3033 up from 1.2986 yen 157.87 up from 157.62 sfr 1.6253 up from 1.6231 stg 0.6656 up from 0.6630 Sterling usd 1.9574 dn from 1.9585 yen 237.14 dn from 237.72 sfr 2.4420 dn from 2.4479 Australian dollar usd 0.7811 dn from 0.8000 stg 0.3990 dn from 0.4085 yen 94.645 up from 94.59