Euro Falls as Trichet Signals One Rate Increase May Be Enough


The euro fell the most against the dollar in more than three weeks as European Central Bank President Jean-Claude Trichet said he has ``no bias,'' signaling one interest-rate increase may be enough to control inflation.

The ECB raised its main refinancing rate by a quarter- percentage point to 4.25 percent, the highest level since 2001. Trichet said he has ``no pre-commitment'' and that today's increase will help bring inflation back below 2 percent.

The euro dropped 0.8 percent to $1.5758 at 9:24 a.m. in New York, from $1.5882 yesterday. It rose to the all-time high of $1.6019 on April 22. The dollar increased 0.9 percent to 106.84 yen, from 105.91. The euro traded at 168.38 yen, compared with 168.20 yesterday.

``Starting from here, I have no bias,'' Trichet said at a press conference in Frankfurt. ``We have no pre- commitment. We do what is necessary to ensure price stability.''

Economic growth may weaken to 1.5 percent next year from 1.8 percent this year and 2.6 percent in 2007, according to ECB staff.

Policy makers raised their target lending rate after holding it at 4 percent for more than a year. The decision was forecast by 57 of 58 economists surveyed by Bloomberg News.

When Trichet signaled after the June 5 policy meeting that an interest-rate increase this month was ``possible,'' the dollar fell 1 percent against the euro.

French President Nicolas Sarkozy, who has criticized Trichet for not following the Fed's example of cutting interest rates, said last week on France 3 television that the ECB ``should ask itself the question about economic growth in Europe and not only inflation.''

The yield advantage of two-year German bunds over comparable-maturity Treasury notes decreased to 1.92 percentage points, making the European securities less attractive to investors.

U.S. payrolls fell by 62,000 last month, following a decline of 62,000 in May, the Labor Department said today in Washington. The median forecast of 81 economists surveyed by Bloomberg News was for a reduction of 60,000.

The dollar weakened 1.2 percent against the euro and 1 percent versus the yen on June 6, when the government reported that the U.S. shed jobs in May.

The U.S. currency dropped 1.2 percent against the euro last week in its second consecutive weekly loss after the Fed gave no indication on June 25 that it will start reversing the most aggressive series of cuts in two decades. The central bank held the fed funds target steady, saying in its statement that ``uncertainty'' about the inflation outlook remains high.

The dollar has lost 12 percent since the Fed made the first of seven reductions in the target lending rate from 5.25 percent in September.

 

 

 


TradingEconomics.com, Bloomberg
7/3/2008 6:41:11 AM