The initial reaction in US currency markets to the surprise European rate cut of 25 basis points was "too little, too late". "It hasn't impressed anybody," said Mr Robin Griffiths, chief technical analyst for HSBC in New York. "The euro is fractionally easier against the dollar so the market is saying: `OK you've done something, but a quarter point is not going to achieve anything here'."
However, the decision of the European Central Bank (ECB) was taken as a positive move by Wall Street, and the assumption that European economies would eventually pick up on the rate cut and that Germany could avoid a recession lifted the Dow Jones Industrial index in early trading.
The US Federal Reserve is expected to give a further boost to the US economy by reducing US interest rates by 25 or 50 basis points when it meets on Wednesday. Fed chairman Mr Alan Greenspan has already cut US interest rates by two full points since the start of the year.
The euro initially rose half a cent against the dollar after the ECB announcement, touching $0.8920, its highest level since Monday, before drifting back to $0.8860.
"It would have been about 90 to the dollar if the market had been impressed by this," said Mr Griffiths on the decision by ECB chairman Mr Wim Duisenberg. "The level at which he would be deemed to be failing and killing the German economy is 87, so it's held up above that."
Mr Michael Hartnett, director of European equity strategy for Merrill Lynch, said he expected a Fed cut on Wednesday. He noted that the ECB had been anti-inflationary for a long period and was now cutting rates when inflation was still above target at 2.6 per cent in March. "It should have raised rates if it is truly anti-inflationary," he said.
American economists polled after the weak April employment report last Friday put the odds at 83 per cent that the Fed would cut rates by half a percentage point next week and that there would be a further cut in June.
Mr Greenspan has long been worried about the inflationary effects of wages outstripping once-soaring US productivity, but productivity actually fell last month. Federal funds futures at the Chicago Board of Trade, usually an accurate predictor, put the odds above 90 per cent for another 50-basispoint rate cut in June.
However, like the majority of analysts in Europe who expected the ECB to hold off on a rate cut until June, US analysts could be wrong-footed by Mr Greenspan. Better than expected weekly employment figures yesterday eased the pressure on the Fed to continue cutting aggressively.
