Euro to start strong after rate cuts -US analysts
By Chris Stetkiewicz
NEW YORK, Dec 3 (Reuters) - The resilience of European currencies on Thursday after a surprise round of interest rate cuts by European central banks shows the region's joint currency will probably enjoy a strong launch in January, economists said.
The rate cuts came three weeks before they were anticipated, and a brief dollar spike reflected mere position adjustment, not any fresh demand for dollars, economists and dealers said.
The Bundesbank and Bank of France both cut their main money market rates to 3 percent from 3.3 percent. They were followed within minutes by the other countries that will adopt the new euro currency: Italy, Spain, the Netherlands, Portugal, Ireland, Austria, Finland and Belgium, which also acts for Luxembourg.
''This may help the dollar a little bit but it's not going to change the current market trend. People were not positioned for this, so we saw some portfolio shifts this morning, some technical shifting,'' said Noralyn Marshall, international strategist at MFR Inc.
The dollar bounced past 1.68 marks, up from a session low at 1.6625 marks, shortly after the announcements that the Bundesbank and other European central banks had jointly cut official interest rates.
But the greenback quickly retraced that rally, retreating toward 1.67 marks in less than an hour.
Late this summer, the dollar fell sharply, tumbling some 12 percent from 1.81 marks to as low as 1.59 marks. Despite a modest rebound since then, the dollar has failed to escape its recent cheaper trading range.
''The dollar has been kind of weak. This provides (Europeans) with an opportunity to lower interest rates without affecting the exchange rate,'' said Mike Fenollosa, international economist at John Hancock Mutual Life.
The 11-nation euro currency, to begin life in January, had been expected to trim demand for dollars as European companies and banks begin to conduct more cross-border business in euros and less in dollars.
Meanwhile, a mammoth U.S. trade deficit continues to pump up the supply of dollars around the world and weighs down the dollar's value.
''Until recently, capital flows had been propelling the dollar higher. But the trade deficit may be approaching the point where people in Europe, particularly, may not be willing to hold dollars,'' Fenollosa said.
A reduction in European interest rates should at the margin produce some demand for dollars, since it boosts the relative returns paid by U.S. fixed income investments.
But interest rate differentials are less of a factor for the dollar against European currencies than against the Japanese yen, economists said.
U.S. rates are much closer to Europe's than Japan's, where a prolonged economic slump continues to keep most market rates below 1 percent.
''The Japanese are looking to invest anywhere but Japan to get better yields. It's not quite as simple as that for the Europeans,'' said one currency dealer.
In addition, the U.S. Federal Reserve had already cut its own overnight interbank lending rate, the federal funds rate, to 4.75 percent from 5.5 percent in three separate moves earlier this fall.
That allowed room for Europe to cut rates without hurting their currencies, economists said.
|
