RTRS: FOREX-Euro drops after ECB rate cut disappoints
By Nick Olivari
NEW YORK, Nov 6 (Reuters) - The euro fell against most major currencies on Thursday after the European Central Bank cut interest rates by half a percentage point, disappointing investors seeking a more aggressive, growth-supportive move.
The ECB cut rates by half a percentage point to 3.25 percent, a relatively small step compared to the Bank of England's shock decision to slash British rates by 150 basis points to their lowest in more than half a century.
While rate cuts typically reduce the attractiveness of a currency, sterling initially rose on the news as investors bet that rate cuts will help stimulate the British economy. The euro also came off session lows as ECB President Jean-Claude Trichet said he did not preclude further rate cuts.
But as the New York session progressed and foreign exchange traders in London left for the day, the euro's decline accelerated with investors perceiving the ECB as being relatively slower to respond to the current financial crisis. The euro's drop also pulled buyers away from sterling and into perceived safer havens such as the yen.
"The market wants to sell the euro because a lot of people think the ECB is behind the curve," said Ron Simpson, director of foreign exchange research at Action Economics in Tampa, Florida.
Midway through the New York session, the euro was down 1.5 percent at $1.2755 and was down 0.8 percent against the pound at 80.58 pence.
The pound was down 0.6 percent against the dollar at $1.5820, but a cent higher than the session low of $1.5722 struck immediately after the BoE surprise.
The dollar was last down 0.6 percent at 97.99 yen , while the euro fell 2.1 percent to 125.09 yen .
The yen was up against most other currencies, rising 0.9 percent against the pound and 1.4 percent against the Canadian dollar , according to Reuters data.
Analysts said the BoE cut indicated the British central bank was doing more than the ECB to bolster its economy, and pushed the euro lower across the board as a result.
The ECB's Trichet said during his press conference after the rate cut that he did not exclude further rate cuts but that the bank was not precommitted in any respect. For details, see [ID:nL6714336].
The International Monetary Fund expects the economy in countries using the euro currency to shrink 0.5 percent in 2009. The IMF expects a 0.7 percent contraction in the U.S. in 2009. [nN06313350].
U.S. PAYROLLS DATA EYED
The Swiss National Bank also surprised investors with an unscheduled interest rate cut, lowering rates by half a percentage point. [ID:nL665760].
The dollar was up 1.3 percent at 1.1804 Swiss francs .
Rate cuts are usually negative for a currency as they detract from its interest rate advantage against other currencies, making it a less attractive investment.
Analysts though, emphasized that as fears of a prolonged economic downturn intensify, the market is largely rewarding proactive central banks who act to stimulate their economies.
In an environment of normal growth, "rate differentials matter but given the current situation, rate cuts are seen as a positive," said Boris Schlossberg, director of foreign exchange research at GFT Forex. "What matters now is their stimulative impact."
Markets had expected the BoE to cut by just 50 basis points, but talk of a more aggressive move had circulated prior to the decision as a deteriorating British economy suggests interest rates will need to fall substantially in the months to come.
Initial market optimism following the election of Barack Obama as U.S. president was short-lived and investor attention now turns to the U.S. government's employment report scheduled for release on Friday.
Fears that key U.S. non-farm payrolls data could come in below already pessimistic forecasts intensified after data on Wednesday showed a gauge of U.S. services sector activity at a record low in October, while private employers made their deepest job cuts in six years.
The Reuters consensus forecast is for U.S. non-farm payrolls to fall by 200,000 in October after dropping 159,000 in September. (Additional reporting by Vivianne Rodrigues and Gertrude Chavez-Dreyfuss in New York and Jessica Mortimer in London, Editing by Chizu Nomiyama)
