Trichet says not pre-committed on rates

NEW YORK/LONDON (Reuters) - European Central Bank chief Jean-Claude Trichet added to uncertainty about euro-zone monetary policy on Monday, saying he would not commit to any interest rate moves before an upcoming policy meeting.

Wary financial markets also absorbed news that the government of the eastern German state of Saxony opted on Sunday to sell its stricken lender SachsenLB to Stuttgart-based LBBW, a move that kept investors on edge.

Answering questions after a speech in Budapest, Trichet said his August 2 policy stance, in which he called for "strong vigilance" to stem inflation, was articulated prior to recent market volatility.

He said the central bank would wait until its next policy meeting on September 6 before deciding what to do next.

"We will then have to assess all of the elements of the economy," he said. "We will assess the risks and will take the appropriate steps at that moment."

Trichet's remarks added to market expectations that central banks may move to inject more liquidity into financial markets to fend off a credit squeeze that has in recent weeks sent markets into a tailspin.

Last week, national central bank officials in Europe told Reuters the recent market turmoil had made a previously expected quarter-point euro zone rate rise to a six-year high of 4.25 percent far from certain.

"It seems as if Trichet is preparing the markets for leaving rates unchanged in September," said Mark Meadows, market strategist at Tempus Consulting in Washington, D.C.

"The ECB was initially very committed to raising rates next month, but in light of the volatility in the stock markets and the amount of cash they had to pump to keep the system working in the past couple of weeks, it would be very surprising to see if they are still going for a hike," he added.

Earlier this month, both the ECB and Federal Reserve injected emergency funds into the economy to prevent credit markets from seizing up.

Markets are expecting the Fed to cut the fed funds interbank overnight rate from the current 5.25 percent at its September 18 meeting to ease the crisis stemming from defaults on mortgages given to people with weak credit histories.

To that end, markets will watch closely when Fed Chairman Ben Bernanke speaks at Jackson Hole on Friday. His theme -- "Housing and Monetary Policy" -- will be particularly timely.

"Markets really need to hear from Bernanke what his assessment of the crisis is and how serious it is and if he thinks there will be more bad news," said Joseph Tan, market strategist at Fortis in Singapore.

The euro fell on Monday, extending losses against the dollar EUR= and yen EURJPY= after Trichet's remark, while euro debt futures FGBLU7 turned positive.

U.S. Treasury debt prices rose and stocks fell on U.S. data showing inventories of unsold homes rose in July to the highest level in more than 15 years.

SUBPRIME EXPOSURE IN EUROPE, ASIA

Germany has borne the brunt of the European fallout from problems stemming from subprime U.S. home loans as two of its banks have almost collapsed, requiring major bailouts.

Finance Ministry spokesman Torsten Albig said the acquisition of SachsenLB would lead "to a strengthening, not a weakening" of the banking sector in Germany.

Jean-Claude Juncker, chairman of the euro zone's group of finance ministers, said the U.S. home loan crisis, which has threatened a global liquidity crunch, would not have a severe impact on the European Union economy.

Japan's new financial services minister, Yoshimi Watanabe, also said U.S. subprime mortgage problems would not spill over and upset the Japanese financial system.

But Rick Lloyd, head of G10 currency trading at ABN AMRO in Singapore, said that "the jury's definitely out on what's going to happen. I can't imagine that we're not going to have some more surprises at some stage."

The risk of massive defaults on subprime mortgages and heavy debts now pose a bigger threat to U.S. economic prosperity than terrorism, a panel of U.S. business economists said on Monday. The conclusion was based on a survey of 258 National Association for Business Economics members conducted between July 24 and August 14.

In Asia, China Construction Bank (0939.HK), one of the country's big four state lenders, said it held $1.062 billion of U.S. subprime mortgage loan-backed securities but expected them to have "limited impact" on its operating results for the year.

Singapore's DBS Group Holdings, state-controlled Bank of China and its Hong Kong subsidiary, BOC Hong Kong, also revealed a combined exposure to the U.S. subprime mortgage market of almost $13 billion.