Greenback makes up recently lost ground vs. most rivals
SAN FRANCISCO (MarketWatch) -- The dollar was up against most major counterparts Thursday, jumping against the euro after the European Central Bank cut its deposit rate and lifted lending rates in the wake of the U.S. Federal Reserve's easing earlier this week.
The ECB cut its official deposit rate by 50 basis points to 1% below the key rate and raised its marginal lending rate by 50 basis points to 1% above the key rate. Its benchmark repo rate remains unchanged at 2.5%. See full story on ECB's move.
"The move is to encourage financial institutions to lend money rather than hoarding," wrote currency strategists at Brown Brothers Harriman. "The move is not unexpected, but has nevertheless succeeded in knocking the euro lower."
Late Thursday, the euro was buying $1.4280, down from $1.4404 in late North American trading Wednesday and sharply down from a three-month high of $1.4716 reached earlier Thursday.
"The ECB is obviously fighting the surge of cash out of U.S. dollar deposits into euro deposits since the Fed's surprise rate cut earlier this week," said Michael Woolfolk, senior currency strategist at the Bank of New York.
On Tuesday, the U.S. central bank slashed its target rate for overnight loans between banks to between zero and 0.25% and said it would buy more debt and mortgage-backed securities.
The dollar index (DXY:
79.64, +0.56, +0.7%) , which measures the U.S. unit against a trade-weighted basket of six major currencies, was at 79.670, up from 78.584 in North American trading late Wednesday.
The British pound retreated to $1.5039 from $1.5509 late Wednesday.
The dollar rebounded versus Japan's currency to 89.51 yen, up from 87.42 yen late Wednesday. The dollar fell to a 13-year low around 87.11 yen Wednesday.
Unsettling euro strength
In recent days, the euro has plowed through a number of key resistance levels at $1.3750, $1.4200 and $1.4600, analysts said. The single currency was trading below $1.400 before the Fed's announcement Tuesday.
With the euro zone already in recession, the euro's sharp rise against both the dollar and the British pound have likely unsettled ECB policy-makers, who fear a stronger currency will further undermine exports, economists said.
Lowering the overnight deposit rate will make it less attractive for banks to park funds overnight with the ECB. Similarly, the rise in the lending rate will make it more expensive for banks to borrow from the ECB.
"The ECB deposit facility had recently ballooned to 200 billion euros, which indicated the European banks were leaving large amounts of cash at the ECB and earning interest, rather than being lent into the market," wrote Matthew Strauss, senior currency strategist at RBC Capital Markets, in a note to clients.
The European bank's step Thursday "still pales next to the Fed's move, but the ECB is likely to cut rates -- the main rate -- on January 15 that will make hoarding even less attractive," he said.
Even after the ECB move, the decade-old single currency continued its surge against the beleaguered British pound. It was last buying 94.94 pence, up 2.3%, after earlier hitting a record high of 95.61 pence.
Earlier Thursday, the euro showed little reaction to a drop in the closely-watched Ifo German business confidence index to a record low. See full story on Ifo index.
"Markets have entered a new era," said strategists at KBC Bank in Brussels. "The biggest economy in the world, which holds the reserve currency, has now the lowest official interest rate and the yield of its long-term bonds is nose-diving, too."
On Friday, Japan's central bank is expected to take further easing steps, too, which could include cutting its benchmark overnight call rate from the current 0.3%. That had been the lowest rate in the developed world until the Fed's move Tuesday. Read more on Bank of Japan's likely move.
Deficit concerns are also pressuring the dollar. President-elect Barack Obama has signaled that he will pursue a major stimulus package when he takes office next month.
That's raised concerns about efforts to fund a rising deficit, at least in the near term, said Kenneth Broux, an economist at Lloyds TSB.
"When you are in an environment where you need to attract $2 billion every day, you need to be worried about the future of the currency," he said.
In the longer term, analysts predict big adjustments in the first half of 2009 as the greenback corrects from its recent safe-haven surge, but many say the dollar will gradually get its legs back later in the year.
