Euro climbs against dollar as ECB hikes rates

Tom Tong08/Apr/2011Currency Updates

GBP

Sterling edged higher against a softer euro on Thursday after the European Central Bank signalled a Eurozone interest rate rise earlier in the day was not necessarily the first in a series.

The Bank of England left its key interest rate on hold at 0.5%. The pound, however, was supported against the euro as many in the market had been looking for ECB President Jean-Claude Trichet, at an ECB news conference, to indicate that more Eurozone rate rises were in store.

EUR

The main news yesterday was the ECB raising the main policy rate by 0.25%, taking it to 1.25%, in-line with market expectations. As a result the euro gained against the dollar to its highest level since January 2010.

A report showing that German exports grew more than forecast – adding to signs that the recovery in the 17 member bloc’s largest economy is gathering pace – also helped to fuel the euro’s rise against the greenback.

The markets currently seem more concerned with Eurozone monetary policy than sovereign debt worries, evidenced by the lack of reaction to the news that Portugal has now asked for financial aid.

USD

The US dollar dropped to a 17-month low vs the euro as the relevant interest rate gap widened, driving GBP/USD to highs not seen since January 2010.

The world’s primary currency pairing received a boost to further outpace the world’s reserve currency. The ECB rate rise leaves the dollar further behind the curve with a greater yield differential and seemingly little concern about fundamental threats that may lurk in the background (which could revive its safe haven appeal). With EURUSD recovering from a quick decline and going on to move steadily above Wednesday’s highs, we saw the trade-weighted Dollar Index drop to fresh 17-month lows. Through the medium-term, a policy shift to match the ECB’s would be best for meaningfully turning the dollar higher; but risk trends are still the most immediate threat to the prevailing trend. That said, with the market barely flinching as a US Government shutdown approaches, fear seems far off.

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Written by Tom Tong

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