Sunday 20 October 2019

Euro slumps on dollar in wake of rate cut

raders work on the floor at the NYSE
raders work on the floor at the NYSE

Herbert Lash

GLOBAL equity markets rallied but the euro slumped against the dollar after the ECB cut interest rates to an all-time low and president Mario Draghi suggested the possibility of negative deposit rates in the future.

The ECB lowered its main rate by a quarter percentage point to 0.5pc – its first cut in 10 months, and held out the possibility of further policy action to support the recession-hit eurozone economy.

The world's biggest central banks, including the Federal Reserve and the Bank of Japan, are trying to encourage economic growth through bond-buying programmes that have pushed interest rates to historic lows and encouraged equity investors.

The benchmark S&P 500 index was poised to set an all-time high, and European shares rebounded after early declines.

The rate cut was widely expected after Mr Draghi said last month that the bank stood ready to act. But the euro fell after Mr Draghi said the central bank is technically ready for negative deposit rates.

The euro slid as low as $1.3038, according to Reuters data, and was last at $1.3066, down 0.84pc on the day. Sterling was slightly stronger at 84.4p to the euro.

While the ECB maintained its assessment that risks to the price outlook are broadly balanced, inflation slowed to 1.2pc in April, well below the central bank's 2pc limit.

Since Mr Draghi pledged last month to act if the economic outlooked worsened, manufacturing output contracted at a faster pace and unemployment rose to a record high of 12.1pc.

If negative deposit rates were adopted, eurozone banks would have to pay to deposit money at the central bank, giving them an incentive to lend money rather than hoard it.

"You've got the Fed still in stimulus mode and Japan surprising markets with the size of their latest stimulus package. Now you have the ECB cutting rates," said Todd Salamone, director at Schaeffer's Investment in Cincinnati. (Reuters)

Irish Independent

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