7:32 PM
Euro steadier after bounce, stocks ease
Addison Ray
By Ian Chua
SYDNEY | Thu Jan 13, 2011 9:50pm EST
SYDNEY (Reuters) - The euro took a breather in Asia on Friday, but was still on track to post its best weekly performance against the dollar in 20 months, while equity markets were lackluster with Japan's Nikkei retreating from an 8-month peak.
The common currency, last at $1.3330, raced to a high of $1.3383 on Thursday after the European Central Bank caught markets off guard by hinting it could lift interest rates to contain inflation, even while the bloc was tackling a debt crisis.
The hawkish comments followed interest rate hikes in Thailand and South Korea this week as policymakers grow increasingly worried about inflationary pressure.
"The signals from the ECB also reinforce our view that it will hike before the Fed does," said Ken Wattret, BNP Paribas chief eurogroup market economist.
"As relatively little in the way of rate hikes has been priced in for this year, the market is likely to continue to shift in the direction of early tightening, absent a resurgence in market volatility."
The euro's rise marked an impressive turnaround from a four-month low around $1.2871 on Monday and set the scene for a retest of the December high of $1.3500. It is up about 3.5 percent this week, the biggest weekly rise since May 2009.
Well-received bond sales from highly indebted euro zone members Portugal and Spain this week and speculation that European policymakers will boost their war chest against attacks on euro zone sovereign debt all contributed to the currency's better tone.
Gains in the euro saw the dollar index .DXY, which tracks the greenback's performance against a basket of major currencies, retreat to below 80.000 from this week's high of 81.313.
But Tsutomu Soma, manager of foreign securities at Okasan Securities, said the euro's rise was nothing more than short-covering from overselling late last year on excessively bearish view on the euro zone.
"Given that the fiscal problems in the region are unresolved, investors will be cautious about chasing the currency higher."
STOCKS SUBDUED
Meanwhile, Asian shares were generally softer as investors took profits on recent sharp gains and as a pullback in oil and metals prices hit stocks of resource companies.
Japan's Nikkei average .N225 slipped 0.3 percent, a day after hitting an eight-month high, while stocks elsewhere in Asia .MIAPJ0000PUS edged down 0.1 percent.
South Korea's KOSPI .KS11 was flat, Australia's S&P/ASX 200 index .AXJO lost 0.2 percent and Hong Kong's Hang Seng index .HSI was 0.1 percent lower.
POSCO (005490.KS) fell more than 1 percent after the world's No.3 steelmaker disappointed investors with its fourth quarter earnings and warned it was struggling to pass on higher costs of raw materials.
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