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Euro May Rise on Speculation Trichet to Signal Rate Increases

July 11 (Bloomberg) -- The euro may advance on speculation European Central Bank President Jean-Claude Trichet will today suggest regional policy makers will raise interest rates at a faster pace than the Federal Reserve.

The currency may add to its 4.9 percent gain versus the dollar in the past three months on speculation Trichet will add to concern over accelerating inflation in the 12 nations that share the euro. European Union Monetary Affairs Commissioner Joaquin Almunia yesterday said the region needs to put in place policies to contain inflation as economic growth quickens.

``Any hawkish remarks from Trichet would reconfirm'' rate increase expectations, said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``This would be euro- supportive.''

The euro traded at $1.2741 to the dollar as of 10:02 a.m. in Tokyo, from $1.2730 late in New York yesterday. It also traded at 145.41 yen from 145.52. The European currency may rise to $1.2780 and 146.00 yen today, Soma said.

The European Central Bank will lift its benchmark rate to 3 percent on Aug. 3 from 2.75 percent, according to all but one of the 24 economists surveyed by Bloomberg. Trichet is scheduled to speak at 3:30 p.m. in Frankfurt today.

``We need to be a little bit careful, we need to adopt economic policies not to increase inflation and not to increase inflation expectations,'' Almunia said yesterday after a meeting of finance ministers from the euro region in Brussels.

Traders also raised bets the ECB will step up rate increases to prevent growth fueling inflation.


The yield on the three-month Euribor contract due in December 2006 rose to 3.66 percent yesterday from 3.645 percent on July 7. The contracts, traded on the London International Financial Futures Exchange, settle to the three-month euro interbank offered rate, which has averaged 16 basis points above the ECB' benchmark rate since the 1999 formation of the euro.

``There's a large concern among ECB officials now that inflation pressures are beginning to mount at a very solid pace within the region,'' said Greg Salvaggio, vice president of capital markets at currency-trading company Tempus Consulting in Washington. ``They'll use interest-rate policy to gear these pressures in. We like the euro to climb toward $1.30.''

U.S. interest-rate futures contracts are pricing in about 65 percent chance the Fed will lift the overnight lending rate between banks by a quarter-percentage point to 5.5 percent next month. The probability had been as high as 85 percent on June 26.

`Military Balance'

Gains in the yen may be limited after Japan's Chief Cabinet Secretary Shinzo Abe yesterday said the government needs to consider whether the country's pacifist constitution would allow a first strike against North Korean missile bases.

North Korea test-fired seven missiles on July 5, including a long-range Taepondong-2.

``With Japanese politicians referring to a pre-emptive attack on North Korea, it is very hard to buy the Japanese currency,'' said Toru Umemoto, chief currency analyst at Barclays Capital in Tokyo. ``It could tip the military balance here and have harmful psychological effects on the Far East.'' The dollar will move between 113 and 115 yen this week, he said.

Japanese Prime Minister Junichiro Koizumi yesterday said his country needs its own deterrent force and will study the legitimacy of striking North Korean bases.

``I see no problem in discussing this issue but we need to consider it carefully because of our constitution,'' he told reporters at a regular press conference in Tokyo.

-- With reporting by Hiroko Komiya in Tokyo. Editor: Harvey (ttt)

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