Higher Rates Likely to Keep Euro Rising - WSJ.com

Higher Rates Likely to Keep Euro Rising - WSJ.com 

NEW YORK—Currency investors' scramble for yield is likely to lift the euro against the dollar this week, but rising concerns about the euro-zone's sovereign-debt crisis could curb the common currency's gains.

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The European Central Bank, headed by President Jean-Claude Trichet, right, is expected to keep raising interest rates in the months ahead as the Federal Reserve leaves rates near zero.

The European Central Bank is expected to continue raising rates in the months ahead while the Federal Reserve leaves U.S. rates near zero for the rest of this year, a prospect that is boosting the euro.

The euro hurdled $1.45 for the first time since January 2010 last week, before pulling back slightly, while some big foreign-exchange banks have raised their forecasts for the common currency. Deutsche Bank and Citigroup now both expect the euro to rise toward $1.50 in coming months.

"The biggest driver for two months now has really been interest rates, interest rates and, of course the third thing being, interest rates," said Jonathan Wetreich, a currency strategist with Brown Brothers Harriman.

As worries grew last week that Greece will eventually need to restructure its debt, and as Moody's Investors Service downgraded Ireland's credit rating on Friday, the euro retreated against the dollar, but only to the $1.44 area, still among the strongest levels it has seen this year.

Late Friday, the euro was at $1.4427 from $1.4494 late Thursday. The dollar was at ¥83.08 from ¥83.45.

Interest-rate differentials will likely push the euro even higher in the week ahead, analysts said.

"It's really a question of whether the euro is getting to a valuation where it's harder to keep going, but I think it will keep going," said Adnan Akant, head of foreign exchange and managing director at money manager Fischer Francis Trees & Watts, a New York unit of BNP Paribas. The money manager is still betting on the euro to rise, though it's not an "overemphasized" position, he said.

"If you clear your head and think about what's going on, it's still an interest-rates story," he said.

The spread between the euro and dollar two-year swap rate touched its highest level since 2008 on Friday, and if it continues to widen, it will be euro-supportive, said Ron Leven, a strategist with Morgan Stanley.

Deutsche Bank raised its euro forecast Friday, projecting the euro will rise to near $1.50 in the next three to six months. The bank had previously expected the euro to trade within a $1.25 to $1.40 range against the dollar throughout 2011. Citigroup now expects the common currency at $1.50 over six to 12 months, up from a previous forecast of $1.45.

Meanwhile, J.P. Morgan Asset Management, one of the world's biggest asset-management firms, has abandoned its bet on a decline in the euro against the dollar, said Robert Michele, global chief investment officer for the New York, London and Asia investment teams of J.P. Morgan Asset Management's Global Fixed Income Group, in a phone interview Friday.

However, the euro-zone debt crisis still poses a risk for the euro, analysts said.

If Greece is forced to restructure its debt, it "is likely to send a shockwave" through the euro zone and its currency, said Brian Dolan, chief currency strategist at Forex.com.

In addition, Finland, which is the only euro-zone country that requires bailouts to be approved by parliament, held parliamentary elections Sunday. The anti-bailout True Finns Party appeared to make a strong showing, according to exit polls, and that could raise fears about whether the results will undermine a planned rescue for Portugal.

Investors continue to view Spain as the real tipping point, though it seems to be on solid ground for now because of headway on reforms and fiscal austerity measures. But market analysts are keeping a close eye on the shaky Spanish housing market, the country's high jobless rate and its vulnerable savings banks.

If such sovereign-debt jitters still weigh on the currency this week, it could mean a mild rebound for the U.S. dollar, Mr. Dolan said.

—Min Zeng contributed to this article

Higher Rates Likely to Keep Euro Rising - WSJ.com