ECB to raise interest rates

Euro

With market liquidity thinning out due to Thanksgiving holiday in U.S. and Japan, trading remained choppy, prompting sharp moves. The dollar surged against the euro at the onset of the week after European Central Bank President Jean-Claude Trichet said the bank was ready to raise eurozone interest rates but was not necessarily planning a series of rate hikes.

The euro tumbled to $1.1685 levels after having peaked to $1.1864 levels boosted by earlier comments from Trichet signalling an imminent rate hike. Markets have fully priced in a quarter-percentage-point interest rate rise at the ECB's next meeting on Dec 1, to 2.25 percent from a historic low of 2.0 percent held since mid-2003.

Mid-week the dollar soon lost momentum after the minutes from the Federal Reserve's latest meeting suggested policy-makers were less concerned about inflation and more wary of allowing interest rates to rise too much.

The minutes, which accompanied the Fed's 12th straight increase in its federal funds rate to 4 percent, highlighted concern among policy-makers over the risks to growth from raising rates too far and their view that the language guiding market expectations on future moves might have to be changed.

The greenback however recouped some of its losses after Richmond Fed President Jeffrey Lacker poured water on speculation that the Fed was close to ending its cycle of interest rate rises.

Lacker told Reuters in an interview that it was too soon to declare that the Fed's rate increases are over, stressing inflation remained a risk amid solid growth. The market's return to the view that for now rate differentials should support the dollar played in the currency's favour.

Last trading session witnessed the dollar peak against the euro after a weaker than expected survey of German business sentiment caused jitters about the future course of eurozone interest rates. The influential Ifo institute survey of German business confidence fell to 97.8, below forecast from 98.8 in October, a five year high.

The data took a little steam out of speculation about the pace of eurozone rate rises, although the ECB is expected to raise rates by 25 basis points in December. The U.S. Federal Reserve's credit tightening campaign with expectations for further increases has helped drive the dollar up more than 15 percent against the euro.

A widely expected interest rate rise from the ECB, U.S. job figures and a Group of Seven finance ministers meeting will keep financial markets on their toes next week.

The G7 finance minister and central banks will meet in London on Friday and Saturday to discuss the sustainability of dollar strength, the potential impact of high oil prices and whether China will show move towards a flexible exchange rate regime in the long term.

Range for this week: $1.1600-$1.1900

Yen

The dollar has gained more than 16 percent against the yen, largely due to the fact that Japanese rates have long been mired near zero.

Low rates battered the yen against other higher-yielding currencies, pushing it to a new eight-year low against the New Zealand dollar and its lowest level against the Australian dollar since 1998.

The yen was also knocked down against the dollar post-Thanksgiving trade, as mixed Japanese inflation data cemented expectations that interest rates in Japan would not rise soon.

Capital flows from the Finance Ministry on Friday showed that Japanese investors were net buyers of foreign bonds for a ninth straight week last week, buying 222.3 billion yen ($ 1.88 billion).

Core consumer prices in Japan were flat in October from a year earlier, as expected, while the core consumer price index for Tokyo was down 0.3 percent in November, slightly worse than economists' forecasts.

Range for this week: Y117.50-Y120.50

Sterling

Sterling held firm cementing recent gains after Bank of England policy this week signalled that interest rates would likely remain on hold for sometime, dispelling expectations of a cut.

Sterling was supported after BoE policymakers made it clear in testimony to parliament's Treasury Select Committee that they are not about to repeat their quarter point August interest rate cut anytime soon.

Policymaker Kate Barker said in a speech that risks to UK economic growth are to the downside but a recent rise in inflation could still nudge up price expectations in the short term. Lending data and final growth figures for the third quarter released earlier did little to change the view that the cost of borrowing is likely to stick at 4.5 percent.

The Office of National Statistics said the economy grew 0.4 percent in the July-September period, unrevised from an initial estimate released earlier, while the annual growth rate moved up to 1.7 percent from 1.6 percent. In the coming week, investors keenly await the consumer confidence and manufacturing data for clues on the interest rate outlook.

Range for this week: $1.7000-$1.7400