Euro Rises on Speculation ECB to Keep Rates at Six-Year High

May 5 (Bloomberg) -- The euro rose against the dollar for the first time in three days on speculation the European Central Bank will keep interest rates at a six-year high this week to control inflation.

The 15-nation currency, down 3.4 percent versus the dollar after reaching a record on April 22, appreciated as ECB President Jean-Claude Trichet said the risk of inflation is ``significant.'' The Australian and New Zealand dollars increased versus the U.S. dollar as commodity prices rose.

``Hawkish tones from the ECB will keep the euro'' in demand, said Dustin Reid, a senior currency strategist in Chicago at ABN Amro Bank NV. ``The market is very focused on any type of price data coming out of Europe.''

The euro rose 0.2 percent to $1.5456 at 10:29 a.m. in New York, from $1.5424 on May 2. It reached a record of $1.6019 on April 22. The euro rose 0.2 percent to 162.82 yen, from 162.53 yen. The dollar traded at 105.42 yen, compared with 105.40 yen.

The U.S. currency pared its drop against the euro as a private report showed service industries expanded in April. The Institute for Supply Management's index of non-manufacturing businesses, which make up almost 90 percent of the economy, increased to 52, from 49.6 the prior month.

The median forecast of 68 economists surveyed by Bloomberg News was for a reading of 49.1. Fifty is the dividing line between growth and contraction.

The Australian dollar advanced 0.7 percent to 94.15 U.S. cents and the New Zealand dollar increased 0.5 percent to 78.38 U.S. cents as the UBS Bloomberg Constant Maturity Commodity Index rose 2 percent on May 2, its first increase in four days.

Exports of raw materials contribute about 17 percent to Australia's economy, while more than a third of New Zealand's export income comes from meat, wool and dairy products.

Weaker Pound

The pound fell 0.6 percent to 78.66 pence against the euro, from 78.23 pence at the end of last week. The Bank of England will keep its benchmark rate at 5 percent on May 8, according to the median forecast of 61 economists surveyed by Bloomberg News. Markets were closed in London for May Day. Sterling dropped 0.2 percent to $1.9688, from $1.9717.

The ECB will leave its main refinancing rate at 4 percent when policy makers meet May 8, according to all 53 economists in a separate Bloomberg News survey. The Federal Reserve cut the target rate for overnight lending between banks by a quarter- percentage point to 2 percent on April 30, the seventh reduction since September.

``The recent rebound in the dollar is unlikely to be sustained given the fundamentals,'' said Michael Klawitter, a currency strategist in Frankfurt at Dresdner Kleinwort, the investment bank owned by Allianz SE, Europe's biggest insurer. ``As such, the euro should gain some ground, at least in the near term.''

Inflation Ceiling

Inflation will exceed the ECB's ceiling of 2 percent for a 10th year, according to the European Commission. Inflation expectations in the euro region, measured by the difference between the yields of nominal and inflation-protected bonds, increased as crude oil traded near a record and commodity prices spiraled higher.

The so-called breakeven rate on 10-year French inflation- linked notes rose to 2.33 percentage points today, from 2.08 percentage points a year ago, reflecting the rate of price growth investors expect over the next decade.

The dollar posted its second consecutive weekly advance against the euro last week on speculation the Fed will stop raising interest rates and the European economy will start to slow down.

Fed Rate

Interest-rate futures on the Chicago Board of Trade on May 2 showed an 86 percent chance U.S. policy makers will keep the target lending rate on hold when they next meet June 25, compared with 80 percent odds on May 1. The balance of bets is for a cut of a quarter-percentage point.

Traders are betting for the first time since December 2005 that the dollar will gain versus the European currency, according to figures from the Washington-based Commodity Futures Trading Commission.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain, known as net shorts, was 21,315 on April 29, compared with net longs of 18,907 a week earlier.

``We may have seen a short-term low in the euro on Friday,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``With the build-up of the short euro position, the risk is that the ECB stays quite hawkish.''

As Russia's Dmitry Medvedev prepares to be sworn in as president on May 7, Merrill Lynch & Co., Goldman Sachs Group Inc. and Deutsche Bank AG predict gains of as much as 4 percent in the ruble in the next six months against a currency basket made up of 0.55 dollars and 0.45 rubles.

The firms say pressure will mount on the Russian central bank to let the ruble appreciate to stem inflation even if it risks damping profits of oil and energy exporters, which according to Merrill Lynch fund more than half of the federal budget. The ruble rose 0.2 percent to 23.7503 against the dollar today, from 23.8012 on May 2.