LONDON (Thomson Financial) - The euro continued to post fresh all-time highs against the dollar, supported by an unexpected upward revision to first quarter GDP growth and robust industrial production figures.
First quarter euro zone GDP was revised up to show a 0.7 pct quarter-on-quarter increase from the previous estimate of 0.6 pct, while industrial output in May posted a 0.9 pct monthly rise, reversing's April's 0.9 pct decline.
Much of the euro's gains in recent days have been interpreted as dollar weakness due to concern about the troubled US sub-prime credit market. However Stuart Bennett at Calyon said a key driver has also been the continued strength of the euro zone economy and rising expectations as to where interest rates for the 13-nation currency zone will peak.
"The upward revision to GDP, although somewhat backward looking, does support the upbeat outlook for euro zone growth and reaffirms the likelihood that the European Central Bank will hike rates to 4.50 pct by January 2008," he said.
Earlier comments from the ECB that it is monitoring inflation risks closely and remains ready to raise interest rates further if necessary also boosted the euro.
The ECB added that interest rates remain "on the accommodative side" even after its June 6 rate hike, which took the main refinancing rate to 4.00 pct, and the medium-term inflation outlook remains subject to upside risks.
Meanwhile attention this afternoon is likely to return to the other side of the Atlantic, with the release of the US May trade balance figures.
The trade deficit is expected to have widened slightly, mainly due to a rise in oil import prices, and could place further pressure on the US currency.
Meanwhile the yen was weaker following the Bank of Japan's decision by 8 votes to 1 to keep interest rates on hold at 0.5 pct. In the accompanying press conference, BoJ governor Toshihiko Fukui gave no new hints about when rates might begin to rise.
Fukui reiterated that the bank will gradually adjust rates, taking into account downside risks and the upside potential for the economy, but said most BoJ board members want to see more economic data before making a decision.
Neil Mellor at Bank of New York said the comments are likely to unsettle expectations that Japanese rates will rise in August.
"On the basis of today's evidence, it must be assumed that the majority on the board may require more reassuring evidence of economic progress if they are to defy the ostensible will of the Ministry of Finance and side with Atsushi Mizuno the sole dissenter in voting for further 25 basis point rate hike," he said.
Finally the pound was steady, though off an earlier fresh 26-year high against the dollar, supported by a strong survey on UK manufacturing.
The British Chamber of Commerce said the sector saw a "major improvement" in activity during the second quarter, with home-sales and orders at a 12-year high.
Earlier sterling shrugged off a the findings of a survey suggesting the UK housing market is coming off the boil.
The Royal Institution of Chartered Surveyors said only a net balance of 10.6 pct of surveyors reported price gains in June, well down on the 22.5 pct seen in May and the long run average of 21.6 pct. The latest figure is the lowest since Jan 2006.
London 1222 BST London 0918 BST
US dollar
yen 122.10 up from 121.95
sfr 1.2010 down from 1.2014
Euro
usd 1.3793 up from 1.3786
yen 168.40 up from 168.16
sfr 1.6566 up from 1.6564
stg 0.6782 up from 0.6773
Sterling
usd 2.0326 down from 2.0346
yen 248.22 up from 248.19
sfr 2.4423 down from 2.4455
Australian dollar
usd 0.8626 up from 0.8623
stg 0.4242 up from 0.4239
yen 105.34 up from 105.21
rachel.armstrong@thomson.com
rar/jfr
