Euro drops against US dollar (page 1 of 2)

Euro

Euro started the week on a watchful mood as market players were ready to dump euro against the dollar on expectations that a 50 basis point interest rate cut in US would help revive the world's biggest economy and the economic recovery in US would be faster than the euro zone.

A rate cut is seen as negative for the dollar in a market where higher yielding currencies perform the best but a recent rebound on Wall Street has shifted investor focus onto equities, which favour a growth boosting easing. Analysts said the Fed's rationale for its decision will be as important the actual move.

In Europe, European Central Bank council member Ernst Welteke discouraged talks of further euro zone rate cuts or intervention to curb the strong euro and the Bundesbank said in its monthly report Germany showed no signs of sliding into deflation at the moment.

He also said that the inflation in Europe would have to fall even further over the medium term before interest rates in euro zone could come down any further. Euro was also supported by a stronger than expected German Ifo business sentiment index, a second straight monthly rise to 88.8 in June from May's 87.6, beating the analysts' expectations.

As the countdown to the decision on US interest rates came closer the greenback was pinned to tight range as most market players were on tenterhooks awaiting the outcome on the Fed's meeting. It was considered a foregone conclusion that the Fed would cut rate as an "insurance" move to help re-ignite US economic growth.

While the financial market was on a wait and watch mode, US consumer confidence index for June came in at 83.5, beating expectations of a drop to 82.4. The consumer confidence data gave a mild boost to the greenback. However, US durable goods fell in May against expectations for an increase. The only bright spot of the US economy was the surge in new and existing home sales.

The Federal Reserve cut U.S. interest rates a quarter percentage point to 1958 lows and suggested it stood ready to take more action if the risk of falling prices worsened.

The central bank's rate-setting Federal Open Market Committee trimmed the bellwether federal funds rate for overnight loans between banks to 1 percent, the 13th rate reduction since early 2001 in a campaign aimed at nursing the economy through a recession and back to vigorous health.

All but one member of the committee voted for the cut with San Francisco Federal Reserve President Robert Parry pushing for a more aggressive half-point reduction. "Recent signs point to a firming in spending, markedly improved financial conditions and labour and product markets that are stabilising," the FOMC said in its post-meeting statement.

"The economy, nonetheless, has yet to exhibit sustainable growth. With inflationary expectations subdued, the committee judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time," it added.

Markets gyrated following the decision with blue-chip stocks falling and Treasury bonds turning lower but the dollar rising. Many in financial markets had been hoping for a larger reduction. As in its statement following its meeting on May 6, the Fed was sanguine about prospects for future growth even as it voiced concern about the risk of deflation or falling prices. "On balance, the committee believes that the latter concern is likely to predominate for the foreseeable future."

Recent data have shown the economy is still crawling back from a relatively mild recession in 2001, a sluggish pace that has pushed the unemployment rate to above 6 percent from under 4 percent late in 2000.