Tuesday February 5, 2008 - 10:49:55 GMT
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Reuters - www.reuters.com
FOREX NEWS-Euro slides as PMI data ups ECB rate cut pressure
(Recasts, adds comment and quote)
By Jamie McGeever
London, Feb 5 (Reuters) - The euro fell sharply on Tuesday
as surprisingly weak euro zone service sector data increased
pressure on the European Central Bank to cut interest rates to
shore up growth.
The euro fell 1 percent on the day against the dollar after
figures showed that the service sector growth across the
15-nation bloc slowed in January to its slowest rate in four and
a half years.
Some countries such as Germany, Spain and Italy registered
contraction. (See [ID:nL05318197])
The ECB meets to set interest rates on Thursday, and is
widely expected to keep them on hold at 4 percent. But investors
and analysts believe the services sector data can only force the
bank to soften its tough stand on inflation, sharpen its focus
on growth and bring forward the timing of its first rate cut.
"The ECB bottom line is that, irrespective of rhetoric that
has already started to look a bit artificial, a move toward a
more cautious stance seems around the corner," strategists at
Unicredit said in a note.
"A shift to neutral should be in the cards for the spring
... (and) such numbers vindicate our view that official rates
will start cruising toward 3 percent (bound to be hit in
mid-2009) sooner than many officials are indicating."
At 1015 GMT the euro was down 1 percent at $1.4675 <EUR=>,
well on track for its steepest one-day fall in two weeks.
The euro's weakness against the dollar helped lift the
greenback across the board. The dollar index, a measure of the
greenback's value against a basket of six currencies, was up 0.9
percent at 76.00 .DXY, moving further away from the two-month
lows struck last week.
CENTRAL BANK STANCES
The dollar was up 0.9 percent on the day against the yen at
107.70 yen <JPY=>, on track for its biggest one-day rise in over
six weeks and moving further away from a three-year low of
104.95 yen struck in January.
The euro's slide pulled major currencies out of the narrow
ranges they were stuck in overnight and added to the dollar's
The Federal Reserve's aggressive rate cuts in recent months
are lending the dollar support as investors take the view the
bold action will support the U.S. economy -- perhaps keeping it
from recession -- and fuel a recovery later in the year.
This contrasts starkly with the ECB's stance so far.
"The Fed's action is allowing the optimists to paint a
better picture, certainly for the second half of the year. Given
the fact they've acted and given that the U.S. futures strip has
discounted additional easing, it's fair to say there's a lot of
bad news priced into the dollar already," said Derek Halpenny,
senior currency economist at BTM-UFJ in London.
The Fed has already slashed rates by 225 basis points and is
seen cutting at least another 75 by the end of the year. Futures
markets expect the ECB to cut rates by 50 basis points by the
third quarter and are split on a further quarter point easing
before the end of the year.
The Bank of England also meets to set rates on Thursday, and
is expected to cut borrowing costs a quarter of a point to 5.25
percent. This would be its second rate cut in three months.
The Reserve Bank of Australia, meanwhile, headed down the
opposite path on Tuesday, hiking rates to an 11-year high of 7
percent and suggested more tightening may be needed.
The Aussie dollar initially pared losses but succumbed to
the U.S. dollar's broad strength in the London session, last
trading down 0.4 percent at $0.9050 <AUD=>.
(Reporting by Jamie McGeever; editing by David
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