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Forex - Euro continues to falter after Mersch comments
LONDON (Thomson Financial) - The euro remained on the backfoot after yesterday's comments from a leading policy-maker at the European Central Bank fuelled speculation that borrowing costs in the euro zone may fall soon. Though Yves Mersch noted that inflation risks were higher and that the economic fundamentals in the 15-nation single currency zone were sound, he did accept that downside risks to economic growth have increased and suggested that the ECB could 'look through' temporary high levels of inflation. Markets seized upon Mersch's comments and pushed euro zone yields lower and the single currency down. 'That it provoked such a large negative reaction is testament to the fact that the market is reluctant to hold any view too avidly, and this leaves it vulnerable to frequent swings in sentiment, with stops being triggered amplifying the moves,' said Daragh Maher, senior FX strategist at Calyon. Mersch's comments continued to dominate market sentiment even after European Central Bank president Jean-Claude Trichet said later that he still sees euro zone economic growth at its potential rate. All eyes therefore will be on Trichet's speech today and whether he goes further in undoing the market's interpretation of Mersch's comments. 'If Trichet endorses the story, then the move down can continue,' said Neil Mackinnon, chief economist at ECU Group. 'If he sticks to his hawkish rhetoric, then we may see a reversal,' he added. Attention this afternoon will turn to Ben Bernanke, the chairman of the US Federal Reserve, when he delivers his half-yearly testimony to the budgetary committee in the House of Representatives. The markets expect him to reiterate his support for further monetary easing in the US. The Fed has cut its benchmark funds rate a full percentage point since September to 4.25 pct and is widely tipped to reduce it another half point on Jan 31. Elsewhere, the pound has been a big gainer today in the wake of the market's readjustment on the euro. 'The pound has been getting both barrels since the Northern Rock crisis started (last September) but its started to look like it's becoming too much way,' said ECU Group's Mackinnon. 'This is a bit of a relief rally as the euro feels the heat,' he added. London 0840 GMT Hong Kong 1pm (0500 GMT) US dollar yen 107.73 up from 106.94 sfr 1.1082 up from 1.0990 Euro usd 1.4590 down from 1.4653 yen 157.31 up from 156.71 sfr 1.6171 up from 1.6110 stg 0.7430 down from 0.7466 Sterling usd 1.9638 up from 1.9629 yen 211.74 up from 209.88 sfr 2.1760 up from 2.1575 Australian dollar usd 0.8819 up from 0.8799 stg 0.4488 up from 0.4482 yen 95.09 up from 94.11 [email][email protected][/email] pp/slj COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.