Euro Gains

The euro rose the most in two weeks against the dollar and gained versus the yen and British pound after European Central Bank President Jean-Claude Trichet said an interest-rate increase in July is ``possible.''

The euro's rally snapped three days of declines against the U.S. currency as Trichet said policy makers are in a state of ``heightened alertness'' over inflation. The ECB kept its main interest rate unchanged today. The dollar rose earlier after the number of Americans filing first-time jobless claims unexpectedly fell last week.

The euro climbed to $1.5540 as of 10:30 a.m. in New York from as low as $1.5365 before Trichet's comments and $1.5440 yesterday. It rose to 164.77 yen, from 162.47, its biggest gain since March 18. The dollar advanced to 106.03 yen, from 105.23.

The ECB has kept its benchmark interest rate at a more than six-year high of 4 percent since June while the Federal Reserve has cut its target seven times since September, to 2 percent, to stave off a recession. Yields on two-year European notes rose to 2.04 percentage points above those on U.S. Treasuries of similar maturity today, the most in at least a decade.

The implied yield on the September Euribor futures contract jumped 24 basis points to 5.17 percent as traders added to bets the ECB will raise borrowing costs to curb inflation.

``It's not excluded that, after having carefully examined the situation, that we could decide to move our rates by a small amount at our next meeting,'' Trichet said at a press conference in Frankfurt after today's rate decision. ``I don't say it's certain. I said it's possible.''

The ECB has cited accelerating inflation as a reason for not cutting rates as the U.S. economic slowdown spreads to Europe. The inflation rate reached 3.6 percent last month, the fastest since the euro's inception in 1999.

``There's a real possibility the ECB will raise rates in July and Trichet is preparing the market for that,'' said Benedikt Germanier, a currency strategist in Stamford, Connecticut at UBS AG, the world's second-biggest currency trader. ``In the short term it could boost the euro.''

Euro Gains, Bloomberg
6/5/2008 8:30:50 AM