FOREX-Euro rises in anticipation of higher rates

Tue Mar 29, 2011 6:46am EDT

Related Topics

* Euro firmer as Trichet supports ECB rate hike expectations

* Support at $1.40, but seen in range below $1.4250

* Euro/yen at post-intervention high; Dlr/yen stuck below 82

(Updates prices, adds quotes)

By Jessica Mortimer

LONDON, March 29 (Reuters) - The euro rose against the dollar on Tuesday, staying supported well above $1.40 on expectations for a euro zone rate rise next month which were reinforced by comments from the European Central Bank chief.

The euro was expected to stay in a range above $1.40 and below last week's high of $1.4249, with analysts expecting gains to be capped ahead of U.S. jobs data on Friday, which would boost the dollar if it came in on the strong side.

The shared currency stayed above $1.40 on Monday despite hawkish comments from two Federal Reserve officials, and gained further support after ECB President Jean-Claude Trichet said inflation was "durably" above the central bank's target. [ID:nLDE72R20A]

Regional data on Tuesday suggested German inflation eased in March, though analysts said it was not sufficient to alter expectations that rates will rise by 25 basis points in April. [ID:nLDE72S0NM]

The $1.40 support level is drawn from a trendline from the low below $1.30 hit in January, while the euro's 21-day moving average stands just above that level, at around $1.4006.

Traders also cited support from sovereign bids around $1.4080 and more around $1.4050, though it was expected to face stiff resistance on the approach to $1.4250, where there is reported to be strong options barrier resistance.

"Euro/dollar is trading at the moment on two factors -- interest rate differentials and the technical configuration," said Niels Christensen, currency strategist at Nordea in Copenhagen.

"The euro failed to break below $1.40 yesterday, and last week it disappointed on the upside, failing to test the November highs (at $1.4283), so it is likely to stay in a $1.40-$1.42 range".

The euro EUR= was up 0.15 percent at $1.4105, comfortably above a low of $1.4021 hit on Monday.

"Intraday, the euro should scurry up to around $1.4175, the tops of two candlestick bodies from late last week," said Nicole Elliott, technical analyst at Mizuho.

A break of $1.4250 would lead to a test of the November high, which would mark its strongest since January 2010. Mizuho's Elliot also saw resistance at $1.43, but said a weekly close above that level could spark a strong rally towards $1.45.

RATE OUTLOOK SUPPORT

Investors continued to focus on the prospect of higher rates and shrugged off the euro zone debt crisis, despite rising concerns about Portugal's ability to finance itself as the country prepares for a snap election. [ID:nLDE72R1RI]

Key euro-priced bank-to-bank lending rates rose on Tuesday, boosted by an expected interest rate rise from the ECB next week. [ID:nLDE72S0V8]

The euro also rose 0.5 percent against the yen EURJPY=R to around 115.64 yen, its highest level since Group of Seven central banks intervened jointly at Japan's request to curb the yen's appreciation following a devastating earthquake. It was on course to test 116.03, above which would mark a 10-month high.

The dollar was up 0.2 percent at 81.91 yen JPY=, though gains were capped by reported offers around 82.00 yen, traders said. They added there were stop loss orders above 82.00 yen, as well as options expiries due at 81.00 and 82.00 yen which could also help keep it hemmed in a range.

A customer dealer for a major Japanese bank in Tokyo earlier reported a significant amount of dollar offers, mainly from Japanese exporters, at and above 82 yen -- the March 18 high hit after the coordinated G7 intervention.

He said the dollar was vulnerable to a drop towards 80.80 yen, though most traders and analysts believe falls will be limited due to fears of possible further intervention.

The dollar index .DXY, which tracks the U.S. currency's performance against a basket of major currencies, was down 0.05 percent on the day at 76.009. (Additional reporting by Natsuko Waki in Tokyo; Editing by Ruth Pitchford)

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