The euro slumped against a range of currencies today, including a one-month low against the dollar, after the European Central Bank cut its main interest rate to a record low and reduced its deposit rate to zero to help tackle the euro zone debt crisis.
Analysts said although the market had been positioned for a 25 basis point cut in the main refinancing rate, the deposit rate cut to 0.75 per cent - effectively encouraging banks to lend funds to each other overnight - caught some by surprise.
Other investors though were hoping for more.
That latter view was reinforced after European Central Bank president Mario Draghi said at a press conference after the rate announcement that the ECB sees a weakening of growth in the whole of the euro zone area and that downside risks to growth are materialising
The dollar posted a two-week high against the yen after favourable US employment data.
"The quarter point rate cut is less aggressive than some had expected given the extent of deterioration in the economies," said Omer Esiner, chief market analyst, Commonwealth Foreign Exchange, Washington DC "Draghi was overwhelmingly cautious, yet did not suggest new liquidity or policy measures being considered, so there is a risk of being behind the curve in addressing a lot of problems, which is negative for the euro."
The euro was last down 1.1 per cent against the dollar at $1.2381, after falling as low as $1.2375. It was last 0.8 per cent lower at 99.14 yen.
Earlier in the session the euro briefly jumped after the Chinese central bank unexpectedly cut its benchmark interest rates in the latest attempt to protect the world's second-largest economy from signs of slowing growth.
But the main focus remained the ECB. Many market players said the rate cut would not tackle structural problems within the euro zone and the single currency could come under further selling pressure.
"It (the rate cut) is more of a symbolic gesture really. It does not change the finances of any country materially," said Patrick Armstrong, fund manager at Armstrong Investment Management, who expected the euro to fall to parity with the US dollar in a year's time.
"We are very negative on the euro, we think all the structural overhangs on deleveraging, austerity and dealing with the debt all result in a very weak euro."
Adding to pressure on the euro, surveys yesterday showed all of Europe's biggest economies are in recession or heading in that direction. Spain also paid higher premiums to sell its debt today than at the previous auction.
Reuters
