4 January 2001, 15:43 Forex: Euro firms midday London trade as market expects ECB to hold rates
LONDON (AFX) - The euro held steady in midday trade with the market
mostly convinced that the European Central Bank will not be persuaded
to cut its refi rate at today's meeting in the wake of the aggressive
50 basis point rate cut in the U.S., dealers said.
The fillip experienced by the dollar after the U.S. rate cut has
been waning, given that most of its recovery came from short covering
activities, analysts said.
Initially, the Fed rate slash led to some talk that the ECB will
match the move with a cut of its own. But a more considered response
indicates that the ECB will not want to jeopardise the euro's
resurgence by cutting rates too soon. In addition, Euro zone data has
been relatively robust, with both manufacturing and services PMI
numbers indicating that economic expansion is still in place.
Euro zone unemployment rates were also steady, signalling that job
creation is stable, analysts said.
While acknowledging there has been talk of the ECB following up
with a rate cut, Nick Parsons, currency strategist at Commerzbank, does
not believe the event will materialise.
The meeting takes place via tele-conferencing and there will be no
press release afterwards, making a drop in rates unlikely, even though
the Fed meeting was conducted in similar conditions, he said.
"That is not the way the ECB tends to act. The ECB wants to be
predictable and a rate cut now will run counter to that," he said.
Comments by Bundesbank council member Hans Reckers, who said there
was no need for the ECB to cut rates in the near future, also helped
the market.
Parsons noted that the possibility of further rate cuts in the U.S.
may not necessarily benefit the dollar.
"The economic situation does not change with a rate cut. The
problem in the U.S. is not high interest rates so lowering rates will
not help," he argued.
The U.S. faces a slump in consumption which even the rate
reductions may not help. The country is simply heading for a liquidity
trap rather like the situation in Japan where even zero-rates hardly
lifted activity, he said.
"We remain very bearish on the U.S. economy and the dollar," he
added.
The dollar's lift also appeared to be temporary elsewhere with both
sterling and the Swiss franc making up lost momentum.
Sterling was just under the 1.50 usd mark, caught in between the
dollar and the euro, both pulling in different directions. It was
weaker against the euro.
Parsons does not expect the Bank of England to cut rates in a hurry
either, saying that the bank is more likely to sit it out until UK
economic data indicates there should be a reduction.
The market remained concerned over the possibility, however, taking
the UK unit a touch lower.
The yen was the weakest of the leading currencies, suffering from
a very gloomy outlook for the Japanese economy and sharp losses on the
Nikkei.
"The Japanese economy is about the only one that looks worse than
the U.S." Parsons said.
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