The euro is set to chalk up further gains in the coming weeks after soaring to an all-time high Wednesday on back of expectations that the US Federal Reserve will cut rates this month as fears grow about the outlook for the giant US economy.
Europe’s common currency surged past the previous record of $1.3852 it hit in July to climb to an all-time high of $1.3860 in early trading Wednesday with the greenback having lost almost 9.0% against the euro over the last year. “The euro is heading in the direction of $1.39,” Bremer Bank analyst Christian Loehr told dpa-AFX. Indeed, the euro’s rise also raises the prospects of the 13-member single currency sailing past the key $1.40 mark possibly in the coming weeks. This is likely to fuel fresh concerns about both the impact on Germany’s key export machine of the soaring euro and the outlook for Europe’s biggest economy especially at a time when US growth appears to be slipping back a gear. By mid-morning trading Wednesday the euro was hovering around $1.3850 with the greenback also tumbling against the Japanese currency to ¥113.98. The yen’s rise came in the wake of the resignation of Japanese Prime Minister Shinzo Abe.
Analysts have been betting that the crisis in the US housing industry and the recent financial market turmoil will trigger slower growth in the world’s biggest economy and consequently result in the Federal Reserve trimming borrowing costs by up to 50 basis points at its meeting next week. The US benchmark rate currently stands at 5.25%. In the meantime, the European Central Bank (ECB) has indicated it is retaining a monetary tightening bias despite having been forced to shelve a planned increase in borrowing costs for this month.
Analysts are expecting the ECB to press on with its rate-hiking cycle once the Frankfurt-based bank is sure that a measure of investor confidence has returned to global markets. “The prospects of further rate increases in the eurozone is supporting the euro,” Antje Praefcke, Commerzbank forex analyst, told dpa-AFX. To be sure, many analysts believe that the ECB will deliver another 25-basis-points rise in the cost of money in the 13-member eurozone by the end of the year. This would be raise the ECB’s benchmark refinancing rate to 4.25% with the bank’s 19-head rate-setting council having last increased borrowing costs in June. Echoing the hawkish remarks he made at a press conference last week, ECB chief Jean-Claude Trichet told the European Parliament’s economic and monetary committee Tuesday that in the eurozone interest rate policy remained “accommodative” and that inflationary risks were on the upside. (m&c.com)