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FOREX-Euro up as ECB hints at exit strategy; yen weak

Published 12/03/2009, 09:51 AM
Updated 12/03/2009, 09:54 AM
EUR/JPY
-

* Euro up as ECB hints at slow-motion exit strategy

* BofA news triggers risk appetite, pushes dollar down

* Yen pulls further away from 14-yr highs vs dollar

(Updates prices, adds comment, adds U.S. data, changes byline, dateline))

By Steven C. Johnson

NEW YORK, Dec 3 (Reuters) - The euro clung to gains against the dollar on Thursday after the European Central Bank hinted that it would slowly start withdrawing emergency spending and the yen fell on fear Japan may intervene to weaken the currency.

After the ECB left interest rates unchanged at 1 percent, its president Jean-Claude Trichet said the next 12-month refinancing operation for banks would be the last. The ECB also lifted the euro zone growth outlook for 2009 and 2010. [ID:nECBNEWS]

But he also said interest rates are at an appropriate level and did not offer any concrete details about the timing of a possible withdrawal of the current ultra-loose monetary policy. Such policies tend to undermine a currency's value because they increase money supply and risk higher inflation.

"He hinted that they'll do something about an exit policy, so the first knee-jerk reaction was euro positive, but he's not ready to endorse a full exit quite yet, so it's really neither overly supportive of nor detrimental to the euro," said Boris Schlossberg, head of research at GFT Forex in New York.

The euro did not break a 16-month high around $1.5145 and was last up 0.2 percent on the day at $1.5080 , off a $1.5141 session peak.

Analysts said Trichet had to walk a fine line, as any hint of a rate rise would prompt traders to bid up the euro, especially as the U.S. Federal Reserve has said it would keep its own rates low for an extended time.

"He's saying the outlook for economic growth is still uncertain, which means he's not overly confident, and it seems that is capping the euro gains," said Hidetoshi Yanagihara, senior FX trader at Mizuho Corporate Bank in New York.

Later on Thursday, Fed Chairman Ben Bernanke will likely be grilled on his intentions regarding monetary policy and his performance atop the U.S. central bank during renomination hearings before Congress.

YEN STRUGGLES

Elsewhere, the dollar was up 1.1 percent at 88.37 yen , well off a 14-year low of 84.82 hit last week, while sterling slipped 0.3 percent to $1.6599 . The euro rose 1.2 percent to 133.16 yen while the dollar slipped 0.3 percent to 0.9989 Swiss francs .

The yen has been on the decline after the Bank of Japan decided to provide new three-month funding at a fixed rate to combat deflation, in an emergency policy meeting on Wednesday.

BOJ Governor Masaaki Shirakawa said the central bank does not target foreign exchange for monetary policy but "if the bank's easy stance becomes widely known in markets, it will have certain effects on the currency market in the long run."

The dollar pulled further away from a 14-year low of 84.82 yen on reports Japan's top Finance Ministry official for currencies met U.S. Treasury officials earlier in the week, increasing speculation Tokyo might act to slow the yen's rise.

The finance ministry controls currency policy in Japan; the BOJ merely acts as its agent in the market.

Earlier, news that Bank of America would repay bailout funds to the U.S. government boosted risk appetite and suggested improvement in the banking sector. That aided stocks and higher-yielding currencies at the expense of the dollar.

(Additional reporting by Tamawa Desai in London; Editing by Chizu Nomiyama)

((steven.c.johnson@reuters.com; +1 646 223 6346; Reuters Messaging: steven.c.johnson.reuters.com@reuters.net))

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