By John Walsh
London, May 10 (BridgeNews) The European Central Bank surprised the market Thursday by cutting the main refi interest rate from 4.75% to 4.50%. The immediate impact of the move was to send the euro surging against the U.S.
dollar and a number of other currencies. But the single currency's strength proved to be short-lived and has since taken a considerable slide, particularly against the greenback.
* * * The markets had been subdued prior to the interest rate decisions by the ECB and the Bank of England's Monetary Policy Committee. The MPC's 25-basis point rate cut was widely anticipated by the market and had little effect on sterling.
The ECB rate cut decision seemed to be just what was needed to break the euro out of its tight trading ranges against the rest of the majors. Its rapid rise to key resistance levels suggested it was poised to breach the psychologically important 0.90 level.
However, once the market digested the news, the euro ran into strong supply and was dumped across the board.
The euro had been trading in the 0.8850-70 zone prior to the ECB announcement. It immediately climbed to 0.8923 but failed to carry any momentum and quickly plunged to hit an intraday low of 0.8805.
ECB President Wim Duisenberg said today's surprise ECB rate cut is an adjustement to lower price pressures. In his regular press conference, Duisenberg said the latest M3 data showed no risk to price stability, as they were distorted higher by some 0.5 percentage points by non-resident money market funds. The key three-month average of euro zone M3 came in stronger-than-expected at 4.8% on the year in March. Taking off the 0.5 percentage point distortion, this would take M3 below the ECB's reference value of 4.5%
Duisenberg also said that a less favorable external environment would contain inflation and that the past impact of high oil prices and a weak euro would diminish over the course of this year. He repeated euro-zone inflation would fall below the ECB's 2.0% target ceiling in 2002.
Traders said they were unimpressed by the reasons Duisenberg gave for his decision. The ECB's efforts to effect a "no change" attitude prior to the meeting also contributed to the euro's decline, according to some traders.
The euro fell more than a full yen from 108.94 to 107.75 and the euro dropped from 0.6250 to 0.6208 against sterling as the market took stock of the 25-basis point cut. The euro also handed back its gains to the Swiss franc, sliding from 1.5438 to 1.5374.
The U.K. released a couple of soft data figures before its monetary policy announcement. Industrial production fell 0.3% in March was and revised down to show a fall of 0.4% in February from the previously reported 0.3% decline.
Manufacturing output fell 0.3% in March and was revise down to unchanged in February from the previously reported 0.1% rise. According to a BridgeNews survey, analysts were on average expecting industrial production to have risen 0.1% in March and manufacturing output to have fallen 0.1%.
Adding to the bad news, the Office of National Statistics revised down its annual trend estimates for industrial production to -2.0% from the previous -1.0%, and its manufacturing output trend estimate to -0.5% from +0.5%.
The Bank of England's MPC cited weakening prospects for the global economy and continued uncertainty over the length of any potential slowdown as its motive for the rate cut.
While sterling has strengthened against the euro, cable has come off a full penny in the afternoon session, falling from 1.4281 to 1.4188. The U.S. dollar benefited primarily from weakness elsewhere although positive data from the jobs market will also have helped. New claims for state unemployment insurance benefits unexpectedly fell 41,000, to 384,000, during the week ended Saturday. Initial claims in the latest week were well below the 420,000 median estimate of analysts surveyed by BridgeNews. The four-week moving average fell 3,000 to 402,500.
The U.S. dollar rose to 122.66 against the yen, up from a low of 122.04 earlier. The euro's weakness appears to have acted as a brake on gains the antipodean had been making against the greenback. The Australian dollar has eased off its high of 0.5266 and the New Zealand dollar has also eased off its high of 0.4273.