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Euro fails to sustain earlier gains as risk aversion sets in

Monday, February 11, 2008

LONDON (Thomson Financial) - The euro fell in afternoon trade with rising risk aversion and a lack of data wiping out earlier gains.

The currency had risen earlier in the day following comments from European Central Bank president Jean-Claude Trichet that there had been no discussion of interest rate cuts at the governing council's meeting last week when rates were left on hold at 4.00 pct. However analysts said that other recent comments from ECB officials coupled with evidence that euro zone economic activity is starting to wane mean the comments did little to later expectations that rates are set to fall in the coming months.

"While Trichet might have been trying to temper rate cut expectations, the less hawkish hue of the ECB last week suggests that the ground work is being

prepared for a rate cut," said analysts at BNP Paribas.

Several major European banks, including UBS and Commerzbank are due to publish results this week which will be closely eyed to see to what extent the subprime losses of US banks are mirrored across the Atlantic.

"Rising risk aversion through greater write-downs would provide support for the dollar against the euro," said the BNP Paribas analysts.

Stocks on Wall Street have also opened down this afternoon, with the dollar and yen gaining on the back of rising risk aversion. This was partly driven by an announcement from American International Group Inc that it has more mortgage debt to write off then previously announced.

Ashraf Laidi, currency strategist at CMC Markets, said Wednesday's release of US January retail sales figures will be key in determining the direction of equity markets this week, which will have a knock-on effect on risk aversion and currencies.

If sales recover after posing a 0.4 pct fall in December then stocks could well receive a much-needed boost.

Meanwhile the pound slipped back a touch after earlier gains, which came on the back of figures showing UK producer prices soared during January.

Output prices rose a monthly 1.0 pct after a 0.4 pct increase in December, the highest monthly rise since January 1995 and well above analyst expectations for another 0.4 pct increase. Input prices rose by 2.6 pct in January from December, far above analyst expectations for a 1.3 pct rise.

Analysts said the numbers signal consumer price inflation could pick up sharply in the coming months, limiting the Bank of England's ability to cut interest rates.

"Today's data will likely add to the already elevated CPI price inflation, and hence we expect the MPC to emphasize upside risks to inflation in its Inflation Report this Wednesday," said Alina Anishchanka, currency strategist at UBS.

Tomorrow sees the release of consumer price inflation data for January, with the annual headline rate expected to have risen to 2.3 pct from 2.1 pct in December.

London 1552 GMT London 1245 GMT

US dollar

yen 106.66 down from 106.73

sfr 1.1038 up from 1.0988

Euro

usd 1.4484 down from 1.4551

yen 154.54 down from 155.31

sfr 1.5993 up from 1.5989

stg 0.7440 down from 0.7470

Sterling

usd 1.9465 down from 1.9478

yen 207.66 down from 207.90

sfr 2.1490 up from 2.1403

Australian dollar

usd 0.9029 down from 0.9100

stg 0.4639 down from 0.4644

yen 96.35 down from 96.54

Posted by MOHAMED SAID at 11:27 AM  

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