Forex

11:16 03/06 (CEP News) Montreal – The staggering rally of the euro continued Thursday following the European Central Bank’s decision to leave rates unchanged.

Ahead of the interest rate announcement, euro longs were wary of any sign of dovishness from the ECB President Jean-Claude Trichet. He was repeatedly asked about the euro in his press conference but said only that excessive moves in foreign exchange are undesirable and noted that U.S. officials preferred a strong dollar – two statements Trichet and other ECB officials have made in the past.

As Trichet spoke, the euro shot up to an all-time high of 1.5373, up 0.107 against the U.S. dollar. Since Feb 7, the euro is up 932 pips – nearly 10 cents.

During the press conference, a journalist told Trichet his comments jolted the euro to an all-time high. “I have said all I have to say about the euro,” the ECB president responded.

CMC Markets chief FX strategist Ashraf Laidi said worries about Trichet talking down the euro were the only thing holding the currency back.

“The market’s anticipation of any comments dampening the euro was enormous,” Laidi said. “All the power for bringing down the euro relies on Trichet’s tongue because the fundamentals are stacked in favour of the euro.”

In the past, the euro has sold off sharply after Trichet called the rise of the currency “brutal”.

The most recent leg up for the euro came after a break of the 1.50 level for the first time. Laidi said past breaks of 1.20, 1.30 and 1.40 have led to three- to four-week rallies.

“This leads us to believe that last week's breach of $1.5000 may signal $1.5500 by next week,” he said.

European manufacturers are struggling with the strong euro and some ECB members have bemoaned the currency’s rise, but Laidi said inflation worries have trumped economic concerns.

“The euro strength is net-net advantageous in that it helps the ECB contain further potential inflation,” he said. “If they didn’t allow the euro’s strength to continue they would need to raise rates.”

Most central banks are currently cutting rates to counteract a potential worldwide slowdown, but markets are beginning to price in the possibility of rate hikes later in the year.

After Trichet’s comments and ECB staff projections of higher inflation, the Euribor strip sold off. Staff projections suggested inflation between 2.6% to 3.2% in 2008; up from a range of 2.0% to 3.0%. Projections for next year were increased to 1.5% to 2.7% from 1.2% to 2.4%.

“Trichet struck a more hawkish tone by acknowledging further upside risks to inflation in light of the revised ECB staff projections and the latest surge in commodity prices,” wrote economists from the Bank of New York Mellon in a note to clients.