Euro up on strong M3, German GfK data; dollar remains firm

The euro rose as data released this morning showed an unexpected acceleration in euro zone money supply, boosting the case for further interest rate rises by the European Central Bank. Euro zone M3 money supply grew by 8.2 pct year-on-year in August, up from 7.8 pct in July and well above expectations for a slowing in M3 growth to 7.6 pct, raising concerns for the ECB about rising medium-term inflationary pressures. "The numbers will simply vindicate the ECB's case to load up with higher rates at the October rate meeting," said David Brown at Bear Stears. The ECB is fully expected to raise interest rates at its October meeting, though there is some talk that the central bank may opt for a bigger 50 basis point rise rather than the usual 25. Meanwhile, also supporting the euro was the latest German consumer confidence survey from the GfK, whose latest consumer climate index for October rose to a near five-year high of 8.8 points from 8.6 in September. This is the twelfth consecutive rise in the index and the highest level since November 2001. The euro rose against the dollar, but the US currency continued to rise against other major currencies following yesterday's strong US consumer confidence and a Richmond Fed manufacturing survey. The data helped diminish expectations for Federal Reserve interest rate cuts as early as January. "Recent US economic data are forcing investors to retreat from the expectation that rate cuts from the US Federal Reserve are imminent," said Steve Pearson at HBOS. This afternoon, focus will turn to the release of US durable goods orders and new home sales figures. Meanwhile, the pound fell after a dovish speech from Monetary Policy Committee member David Blanchflower, and data showing an unexpected downward revision to second quarter GDP. Official data released this morning unexpected showed that the quarterly rate of growth for the second quarter was revised down to 0.7 pct from the previous estimate of 0.8 pct, against expectations for no change. The annual rate was left at 2.6 pct, however. Meanwhile, Bank of England rate-setter David Blanchflower painted an altogether softer picture on the outlook for the UK economy, saying that both inflation and growth are likely to come in lower than expected. Blanchflower was the only Monetary Policy Committee to vote against an interest rate rise in August. "Today's comments by David Blanchflower cement his place as currently the most dovish member of the Monetary Policy Committee, and it is clear that he leans towards the view that the eventual next move in interest rates should be down rather than up," said Howard Archer at Global Insight.