JANUARY 13, 2011, 11:12 A.M. ET.UPDATE:

Euro Extends Gains On ECB's Trichet Hawkish Comments

-By Clare Connaghan
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--The euro extended gains across the board Thursday after the first sounds of hawkishness emerged from European Central Bank president Jean-Claude Trichet.

The 17-country currency rose above $1.33 against the dollar and edged up against the pound and yen after Trichet said that the inflationary pressures in the euro area appeared to be short term and isn't alarming policy makers, but insisted that he and his colleagues are "permanently alert" about risks to price stability.

"The ECB's macro-economic assessment has taken a shift towards more hawkishness," said Carsten Brzeski, an economist at ING Bank NV. "On growth, this shift was rather marginal...On inflation, however, the ECB sent a stronger message of hawkishness," he added.

Furthermore, Trichet's reminder to the market that the ECB increased its interest rate in summer 2008, when food prices had lifted inflation rates, has also garnered a lot of attention.

"These references to the ECB raising rates in July 2008 come across as hawkish, particularly as there is a perception that the ECB made a mistake when it hiked in July 2008," said Howard Archer, chief U.K. and European economist at IHS Global Insight in London.

Despite the more upbeat tone in Trichet's comments, the chances of a rate hike anytime soon are still slim, market participants say.

"The Euro zone periphery is economically still too weak to stomach higher rates, the sovereign debt crisis is far from over and a rate hike would not stop commodity prices from increasing," said ING's Brzeski.

"At the current juncture, a rate increase would still do more harm than good," he added.

Earlier in the day, the ECB left its benchmark policy interest rate unchanged at 1.0%, as widely expected.

At 1557 GMT, the euro was trading at $1.3325, compared with $1.3226 before Trichet started speaking, according to trading system EBS. Against the pound, the euro was trading at GBP0.8413 compared with GBP0.8368 before the press conference started.

-By Clare Connaghan, Dow Jones Newswires, +44 (0) 20 7842 9496; clare.connaghan@dowjones.com

http://online.wsj.com/article/BT-CO-201 ... 09969.html