Foreign Currency Report 20 April 06

GBP
Sterling hit its highest in nearly three months against the dollar yesterday and rose versus the euro after the release of the MPC minutes.

Slightly hawkish minutes released yesterday from the Bank of England's April meeting cemented expectations for steady interest rates. As expected, Monetary Policy Committee members voted 7-1 to leave rates steady at 4.5 percent. Stephen Nickell called for a 25 basis point cut for the fifth month running, but members thought there had been little news since the March meeting with economic growth continuing steadily.

Most MPC members still saw risks to prices stemming from higher energy costs and noted that people's inflation expectations had picked up in recent surveys and would need to be monitored carefully.
UK consumer prices data for March is due out today.

EUR
The euro may rise for a sixth day against the dollar and yen on speculation a report today will show inflation in Europe accelerated last month.

Signs of inflation may prompt the European Central Bank to keep raising interest rates.

Consumer prices in the region probably rose 0.6 percent in March, the fastest pace in a year and double the 0.3 percent in the previous month, according to the median estimate of 34 economists surveyed by Bloomberg.

The prospect of higher ECB rates after in the short term reduced as ECB President Jean-Claude Trichet quashed speculation of an increase in May but there are expectations the ECB will lift its benchmark three more times to 3.25 percent.

Europe's central bank said in its monthly report last week interest rates in the region are still ``very low'' and there are risks inflation may accelerate.

USD
The dollar earlier came under broad pressure on concerns that U.S. interest rates might be close to a peak. However the US dollar rallied slightly off the back of stronger-than-expected core US inflation data.

Currency talks begin today between G-7 countries meeting in Washington, and will focus on the Japanese yen and the Chinese yuan.

NZD
The New Zealand dollar continued its recovery, firming as New Zealand's consumer price index rose 0.7 per cent in the first quarter.