LONDON (AFX) - The euro fell below its key support level of 0.89 usd at midday as surprisingly stong euro zone money supply data, combined with hawkish comments by a Bundesbank official, dampened hopes of an interest rate cut by the European Central Bank tomorrow, dealers said.
"The market is scaling back its expectations that the ECB will cut rates tomorrow," Kamal Sharma at Commerzbank said.
"Most of the market participants have taken the M3 data to imply that there will not be a rate cut tomorrow," he added.
This view was supported by hawkish comments by Bundesbank council member Klaus Dieter Kuehbacher, who reportedly said that it is too soon for the ECB to cut rates and that conditions for a monetary easing might be ripe in May or June.
"Kuehbacher is all hawkish on rates," Sharma said. "Our view is that the ECB won't cut rates tomorrow, but there is a good chance that they will lower rates on April 11."
According to dealers, lower euro zone borrowing rates would be beneficial for European asset markets, which in return would bolster the single currency.
Earlier comments by the Spanish economy minister Rodrigo Rato, who said that he is not in favour of an early rate cut, has also taken away some of the euro's shine, dealers added.
"Rato is a government minister and the ECB is independent of the Spanish government. His comments, however, might be weighing a bit on the euro, given Issing's comment earlier in the week that the market has misinterpreted his apparently dovish tone," Jane Foley at Barclays Capital said.
The euro posted a new 2001 low against sterling, trading at 0.62 stg at midday, and fell as low as 0.8849 against the dollar, dealers pointed out.
At the same time, stg/usd is still tied to the fortunes of the eur/usd, Sharma said.
"The UK economy is still set to outperform the U.S. economy this year," therefore the move lower in stg/usd is not been justified, the Commerzbank analyst added.