The ECB may keep the interest rate at 4.25% for a year

European Central Bank President Jean- Claude Trichet may look beyond a likely contraction in the euro region's economy and keep interest rates at 4.25% to avert wage-price hikes. Investors who seized on Trichet's Aug. 7 comments that growth will be ``substantially weaker'' and raised bets that the next step will be an easing/lowering missed the point, said Andreas Scheuerle, an economist at Dekabank in Frankfurt. The reaction to the remarks, which drove the euro down almost seven cents against the dollar, overshadowed Trichet's warning minutes later that his priority is preventing the fastest inflation in 16 years from becoming entrenched. ``Market expectations that the next move will be a cut are premature,'' said Juergen Michels, an economist at Citigroup Inc. in London. ``When it comes to the crunch, the ECB will sacrifice growth to fight inflation.'' The EUR/USD is currently trading at $1.4956 as of 7:53 am, GMT.

U.S. retail sales probably dropped in July for the first time in five months as record gasoline prices siphoned the tax rebates out of consumers' pockets, economists said before reports today. Consumer spending, which accounts for more than two-thirds of the economy, is likely to keep fading after growing at the slowest pace in 17 years. Americans will still be faced with rising unemployment, falling property values and higher fuel costs after the rebates have been spent. ``Once the rebate checks go away, there is not a lot of underlying support for the consumer,'' said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina.

The U.K. pound was little changed against the euro and the dollar. The pound snapped a three-day gain versus the euro yesterday and fell to the weakest level in almost 21 months against the dollar after the Royal Institution of Chartered Surveyors said U.K. house prices fell in July, adding to evidence the economy is slowing. Britain's sputtering economy will weaken the pound to $1.85 and to 82 pence per euro by year-end, according to analysts and senior traders. The GBP/USD is currently trading at $1.8976 as 8:15 am, GMT.