Euro, pound pressured after ECB, BOE interest rate cuts
SAN FRANCISCO (MarketWatch) -- The dollar benefited from rising risk aversion Thursday as U.S. stocks crumbled, while interest rate cuts by the European Central Bank and the Bank of England weighed on the euro and the pound.
The dollar index , a measure of the greenback against a trade-weighted basket of six major currencies, was at 86.280, up from 84.794 in late U.S. trading Wednesday.
On Wall Street, all three major indexes ended sharply down, as mostly bleak retail sales data underscored economic woes. See Market Snapshot.
The Frankfurt-based ECB lowered its key borrowing rate by half a percentage point to 3.25%, as forecast.
The BOE's move, on the other hand, exceeded forecasts. It slashed its key interest rate 1.5 percentage points to 3.0%, considerably more than the half-percentage point cut anticipated by many analysts. Read more on ECB, BOE rate cuts.
"U.K. interest rates fall are now below those in eurozone for the first time in the life of the euro. Today's 150-basis point rate cut is a serious blow to the pound's role as a central bank reserve currency," said Ashraf Laidi, chief foreign exchange strategist at CMC Markets US.
Late Thursday, the euro was buying $1.2677, down from $1.2948 late Wednesday. The pound was at $1.553, down from $1.5926 in late Wednesday.
"The pound is leading the currency move lower and has now broken through all the major retracement levels of the pound's rally from the year's low in late October to the early November highs,' wrote strategists at Brown Brothers Harriman in a research note.
While the ECB's cut was less dramatic, ECB President Jean-Claude Trichet said the central bank's Governing Council discussed a larger rate cut, and signaled its door is open to the possibility of more cuts.
"The ECB will likely cut rates further, possibly as early as December. The total easing is more difficult to pinpoint," said Elga Bartsch, strategist at Morgan Stanley in London.
"The Bank could afford to be less aggressive than before because it hadn't tightened as far as others, because the euro is depreciating, because of the changes in the operational framework and because underlying inflation might prove to be persistent," she said in a note to clients Thursday.
The potential for a continued rise in risk aversion amid unsettled financial conditions is likely to leave the euro and the pound under pressure against the dollar, said strategists at Commerzbank.
Risk aversion tends to benefit lower-yielding currencies, particularly the yen. The Bank of Japan's benchmark, at 0.3%, is the lowest of the developed world.
The dollar was buying 97.43 yen, down from 98.41 late Wednesday, and the euro fell to 124.22 yen from 127.45 yen Wednesday.
Grim U.S. data
The dollar also benefited from weakness in dollar-denominated crude oil futures, which slipped 7%, as recession concerns escalated. See full story.
On the U.S. data front, the government said U.S. companies cut back employees' hours in the third quarter, with productivity growth up more than anticipated. See Economic Report.
Productivity in the nonfarm business sector increased at a 1.1% annualized rate as output fell 1.7% and hours worked dropped 2.7%. The decline in output was the largest since the recession in 2001.
Economists surveyed by MarketWatch had expected productivity to increase at a 0.3% annual rate.
October same-store-sales results showed record-low consumer confidence haunted retailers that month, with most missing already-lowered monthly sales expectations, signaling a dreary outlook for the crucial holiday season. See full story.
A separate government report showed continuing claims for unemployment reached a 25-year high. See Economic Report.
The data came ahead of Friday's non-farm payrolls report for October, with the unemployment rate expected to rise to 6.3%.
"If non-farm payrolls fall more than 250,000, it would be initially negative for the US dollar, but when the US stock market opens, we could see the dollar rally," wrote Kathy Lien, director of currency research at GFT.
"Traders need to remember that the dollar is appreciating not because of the strength of the U.S. economy, but because money flocks into low yielding currencies during a global recession," she said.
