Euro Lords It Over Dollar
By Javier David
Thursday 08 May 2003
NEW YORK - The euro surged to a four-year high against the dollar on Thursday, as the European Central Bank's decision to keep interest rates unchanged kept intact the yield advantage of euro zone assets.
In a widely expected decision, ECB kept benchmark rates steady at 2.50 percent, but underscored the same risks to deflation cited by the U.S. Federal Reserve on Tuesday when it held interest rates steady at 1.25 percent.
Though some in the market had hoped the ECB would take advantage of the easier monetary conditions presented by the soaring euro to cut rates, Europe's higher-yielding assets gave investors incentive to continue buying the single currency.
'The dominant theme remains the euro yield strength and after this morning's decision, that theme was resoundingly reinforced,' said Joe Francomano, vice president of foreign exchange at Erste Bank.
The euro rose above $1.15 against the dollar (EUR=) for the first time since January 1999, when it was launched at $1.17. This was up more than 1.20 percent on the day.
The Swiss franc followed the euro higher, hitting four-year peaks versus the dollar below 1.31 francs (CHF=).
The single currency also hit a record high against the British pound, trading as high as 71.92 pence (EURGBP=) before easing off those levels slightly in late trading.
Against the yen, the euro bought 134.34 yen (EURJPY=), up 1.65 percent on the day and also at its highest in four years. Meanwhile, the dollar traded around 116.84 yen (JPY=), supported only by traders' fear Japan could sell its currency in order to weaken it.
STRONG EURO -- IS EUROPE WORRIED?
Over the past six weeks, the euro has risen 9 percent against the dollar, a sharp turn of events for a currency that spent the first two years of existence being sold relentlessly by traders skeptical about European economic integration.
On Thursday, ECB President Wim Duisenberg told reporters there is nothing yet excessive in the euro's current levels, saying they better reflected economic fundamentals.
But late in the day, European Union Monetary Affairs Commissioner Pedro Solbes voiced concerns over the speed of the euro's rise, saying it was a 'point of special concern.'
Many German companies have complained that the single currency's gains have begun to take a toll on their profits. Though analysts are cognizant that a strong euro may eventually hurt euro zone growth, Duisenberg's words seemed to carry the day -- at least for the moment.
'People were nervous that Duisenberg would come out with cautious tones about the strong euro, and he did not do that at all,' said Lara Rhame, U.S. economist at Brown Brothers Harriman in New York. For the most part, European policymakers 'seem thrilled,' she added.
Elsewhere, the Bank of England left its benchmark interest rate unchanged at 3.75 percent. Sterling shot to a peak of $1.6079 (GBP=), before edging down to $1.6017.
But currency strength is something Japan's troubled economy cannot afford. Finance Minister Masajuro Shiokawa said officials were watching moves in currency rates.
Data released on Thursday showed Japanese authorities spent 2.38 trillion yen ($20.44 billion) on currency intervention in the January-March quarter, buying dollars and euros.
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