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Euro at 4-Month High on Interest Rate Promise

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The implied promise of a rate hike by the European Central Bank (ECB) in April sent the euro soaring on Monday to more than $1.40, as investors welcomed signs that the ECB would take more direct steps to deal with inflation.

While the joint currency had fallen a bit on the news of the Greek devaluation by Moody’s and concerns over rising oil prices, it had stayed strong since last week’s surprise statement by Jean-Claude Trichet, president of the ECB, that that body would most likely increase interest rates next month. Analysts had not expected action on that front till the fourth quarter.

Reuters reported that apparent buying from Middle East accounts buoyed the currency, with accelerating gains coming from triggered stop-loss orders as the currency hit first $1.4005 and then $1.4025. However, it stalled before it reached a $1.4050 options barrier.

Richard Wiltshire, chief foreign exchange dealer at ETX Capital, said of the euro’s rise, "Sentiment is bullish at the moment and we could see a test of the 1.4080/00 area." He added, "The euro will stay bid on any dips ahead of April's rate announcement. I would assume they can't change their rhetoric, and we have seen a growing number of ECB officials talking about rate hikes sooner rather than later."

The promise of a rate increase has encouraged investors to set aside concerns about rising oil prices, unrest in the Middle East/North Africa (MENA) area, and downgrades of Greece by Moody’s on Monday and Spain’s outlook by Fitch on Friday.

Niels Christensen, currency strategist at Nordea in Copenhagen, said of the optimism, "There's a bit of bad news with the Greece downgrade and Ireland wanting to renegotiate [its] bailout and there's some focus on this, but it's too early for concerns about sovereign debt to really come back and hurt the euro."