Euro ends rally as focus shifts to rise in interest rates

Concerns over effect on Europe's economies stifle lift against dollar


June 09, 2000|By BLOOMBERG NEWS

NEW YORK - Ending a four-day rally, the euro fell against the dollar yesterday on concern that the European Central Bank's decision to raise interest rates more than expected could hurt economic growth

Europe's 11-nation currency had rallied as much as one U.S. cent after the central bank lifted rates by half a percentage point - double what economists forecast.

"After the initial euphoria, the market started to worry this might stifle some of the economic upswing in some of the countries in Europe," said Per Norr, a trader at Den norske Bank.

"Once the move was absorbed, they realized this could really affect Europe," said Norr.

The euro fell to 95.60 U.S. cents from 96.22 cents in late New York trading Wednesday. It earlier jumped as high as 96.99 cents just before the rate decision, its strongest since April 4.

ECB policy-makers raised the benchmark refinancing rate to 4.25 percent, the fifth and biggest increase in seven months, in a bid to prevent improving economic growth and the euro's decline from fueling inflation.

"The knee-jerk reaction was to take the euro higher," because the interest-rate gap with the United States is narrowing, said Marc Chandler, chief currency strategist at Mellon Financial Corp. "Most people were not expecting this major rate hike. The euro was bought because a lot of people in the market use interest rate differentials" to trade, he said.

Higher rates boost a currency as they drive up returns on money in short-term deposits, attracting international investors.

At the same time, higher borrowing costs can hurt company profits, slowing economic expansion and business investment.

"The European Central Bank may be over-killing the economy," said Chandler at Mellon. "We're going to be paying more attention to any pockets of weakness in economic data."

The euro had gained as much as 8 percent in the past three weeks, buoyed by expectations for higher interest rates and by signs the pace of economic growth in Europe may be catching up with the United States.

The euro zone's economy is expected to grow 3.5 percent this year, the fastest pace in a decade, according to the Organization for Economic Cooperation and Development.

That acceleration is partly the result of the euro's 18 percent drop against the dollar since its debut at the start of last year, which helped exporters by making the region's goods cheaper abroad.

Some economists and traders speculate that the region's recovery may be too fragile to thrive with rapidly rising borrowing costs.

"A lot of people are wondering, was that necessary at this stage?" Norr at Den norske said of the interest-rate boost.

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