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Oil Surge Spurs Bets ECB to Raise Interest Rates

Date: Wed, 23 Feb 2011

The single currency climbed to a two week-high versus its
U.S. counterpart also gained versus the yen and Swiss franc. The
Dollar Index snapped two days of advances before a report
economists said will show sales of previously owned homes in the
U.S. dropped. Oil prices approached a two-year high amid
intensifying violence in Libya. The pound strengthened versus
the dollar and euro as minutes of the Bank of England’s Feb. 10
meeting showed three out of nine policy makers voted for an
increase in rates.
     “The market is focusing more on prospects for higher
interest rates and this speculation should offer further relief
for the European unit,” said Roberto Mialich, a senior currency
strategist at UniCredit SpA in Milan. “The Federal Reserve’s
position is very clear; the U.S. outlook is still uncertain and
they don’t want to raise rates too soon.”
     The euro rose 0.6 percent to $1.3737 as of 7:37 a.m. in New
York, after appreciating to $1.3744, the strongest since Feb. 9.
The single European currency advanced 0.7 percent to 113.74 yen.
The dollar was at 82.78 yen, from 82.77 yen yesterday, when it
reached 82.53, its weakest since Feb. 10.
     ECB officials will “inevitably” have to “rebalance our
monetary policy stance,” with the 17-nation euro-area economy
strengthening and inflation in breach of the central bank’s 2
percent limit, council member Yves Mersch said yesterday,
without giving a time frame. Policy makers will take the
decisions necessary to maintain price stability, ECB President
Jean-Claude Trichet said in Frankfurt today.

                         ‘Turn Hawkish’

     “As policy makers turn hawkish, I get a sense they are
getting ready to change their policy stance next week,” said
Naoto Minatogawa, a currency analyst at Himawari Securities Inc.
in Tokyo. “The euro has been supported.”
     Futures show traders added to bets for higher borrowing
costs. The implied yield on the three-month Euribor futures
contract for December rose to 1.97 percent today from 1.99
percent yesterday and 1.88 percent on Feb. 16. Futures on the
CME Group Inc. exchange show a 27 percent chance Fed policy
makers will boost their main rate to 0.5 percent in December,
down from 32 percent a week ago.
     The Dollar Index, which tracks the greenback against the
currencies of six major U.S. trading partners including the
euro, yen and pound, fell 0.4 percent to 77.431.

                        House Purchases

     U.S. house purchases decreased 1.1 percent from December to
a 5.22 million annual rate, according to the median forecast of
73 economists surveyed by Bloomberg News. A 13-year-low 4.91
million existing houses sold in 2010. The National Association
of Realtors’ data is due at 10 a.m. in Washington, with
economists’ estimates ranging from 4.86 million to 5.5 million
after December’s 5.28 million pace.
     German Chancellor Angela Merkel signaled yesterday that
European Union leaders may be ready to renegotiate the terms of
Greece’s bailout as part of a broader package to shore up
confidence in the euro.
     “There certainly is a discussion about whether to consider
extending the running time of the Greek program,” Merkel said,
noting that last year’s aid plan for Greece was limited to three
years while Ireland’s bailout package, agreed last November,
runs for seven years. “It’s one point that’s on the table.’

                          ‘Civil War’

     Continued protests “will lead to civil war,” Libyan
leader Muammar Qaddafi said yesterday in Tripoli. The nation
holds Africa’s largest crude reserves. Qaddafi’s crackdown on a
week-long uprising has already left more than 200 dead,
according to Human Rights Watch.
     Crude for April delivery rose as much as 0.9 percent in
electronic trading on the New York Mercantile Exchange, after
climbing yesterday to the highest since October 2008.
     Sterling gained 0.7 percent to $1.6246 and was little
changed at 84.53 pence per euro, from 84.59 pence yesterday.
     Spencer Dale joined Andrew Sentance and Martin Weale in
voting for higher rates as a growing number of officials said
the case for tightening policy had “grown in strength,”
minutes released in London today showed.
     The pound may strengthen to $1.65 during the next few weeks
as speculation mounts that the Bank of England will raise its
main rate from a record low 0.5 percent, before weakening on
concern that higher borrowing costs will crimp economic growth,
according to Hans-Guenter Redeker, head of global currency
strategy at BNP Paribas SA in London.

                          Higher Rates

     “We will have to think about the sustainability of higher
interest rates in an environment where the economy is highly
leveraged,” Redeker said in an interview. “Credit is still
weak.” Sterling support “may last several weeks,” he said.
     The New Zealand dollar, known as the kiwi, strengthened
after Moody’s Investors Service said it sees no immediate impact
from the Christchurch earthquake on the nation’s Aaa credit
rating.
     “We’ve seen the kiwi bounce as the market was a little bit
carried away in pricing an immediate rate cut,” said Annette
Beacher, head of Asia-Pacific research at TD Securities in
Singapore. “There are record high commodity prices in New
Zealand at the moment and the Reserve Bank puts a lot of weight
on commodity prices and the terms of trade boom, so it’s
unlikely that we’ll see a cut.”
     The earthquake killed at least 75 people and the disaster
is likely to cost reinsurers around NZ$5 billion ($3.7 billion),
Prime Minister John Key said.
     The kiwi was little changed at 74.63 U.S. cents after
strengthening to 75.13 U.S. cents. It declined yesterday to its
weakest level against the U.S. currency since December. The New
Zealand dollar was also little changed at 61.79 yen.

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