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Business Home > Forex
Euro falls broadly after ECB cuts rates

(Reuters) / 5 July 2012

The euro fell sharply against a range of currencies on Thursday after the European Central Bank cut its main interest rate to a record low of 0.75 percent and reduced its deposit rate to zero to help tackle the euro zone debt crisis.

Analysts said although the market had been positioned for a 25 basis point cut in the main refinancing rate, the deposit rate cut - effectively encouraging banks to lend funds to each other overnight - caught some by surprise.

“Easing the policy rate is bearish and easing the deposit rate suggests there may be more to come. We would suggest the greatest sell is going to be the euro on the crosses,” said Steven Saywell, head of FX strategy at BNP Paribas.

The euro fell 0.7 percent against the dollar to $1.2432, after triggering reported stop-loss orders at $1.2495. Support was expected around last week’s low at $1.2407.

It fell 1 percent against the yen to 98.96 yen.

Earlier in the session the euro briefly jumped after the Chinese central bank unexpectedly cut its benchmark interest rates in the latest attempt to protect the world’s second-largest economy from signs of slowing growth.

Analysts said investors would now be focused on ECB President Mario Draghi’s news conference, starting at 1230 GMT, for any hints on how the ECB plans to respond to Europe’s debt crisis, such as another long-term refinancing operation (LTRO).

Many market players said the rate cut would not tackle structural problems within the euro zone and the single currency could come under further selling pressure if no long-term measures are announced in the ECB news conference.

“It (the rate cut) is more of a symbolic gesture really. It does not change the finances of any country materially,” said Patrick Armstrong, fund manager at Armstrong Investment Management, who expected the euro to fall to parity with the US dollar in a year’s time.

“We are very negative on the euro, we think all the structural overhangs on deleveraging, austerity and dealing with the debt all result in a very weak euro.”

Adding to pressure on the euro, surveys on Wednesday showed all of Europe’s biggest economies are in recession or heading in that direction. Spain also paid higher premiums to sell its debt on Thursday than at the previous auction.

Euro lower on the crosses

The euro came under pressure against growth-linked currencies with the Chinese rate cut seen as supporting perceived riskier assets.

The single currency fell to a record low of A$1.2074 versus the Australian dollar and a record trough against the New Zealand currency of NZ$1.5449.

Some analysts said although commodity currencies had benefited from an improvement in risk appetite after the EU summit deal, the longer-term outlook was clouded.

“The Australian dollar is likely to come under pressure as signs of a global slowdown continue to emerge and we see further warning signals coming from China,” said Ian Stannard, head of European FX strategy at Morgan Stanley.

The Bank of England voted to restart its quantitative easing programme with another 50 billion pound cash injection, a move that was widely anticipated by the market.

The euro fell to a five-week low against sterling of 79.81 pence, as the ECB rate cut and concerns about the currency bloc’s debt crisis outweighed looser UK monetary policy.


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