Euro Declines after the ECB Lowers Benchmark Interest Rates

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Euro Declines after the ECB Lowers Benchmark Interest RatesThe euro plunged to the lowest level in four months versus the dollar after the European Central Bank slashed the interest rates and hinted at further easing policies to tame the stubborn disinflation across the euro area.

The ECB slashed the deposit rate to -0.1 percent, the emergency borrowing rate-or marginal lending rate- to 0.4 percent, and the main refinancing rate to 0.15 percent.

The euro plunged to $1.3557, the weakest level since February. The currency has plunged 3.1 percent from a high of $1.4000 after ECB President Mario Draghi hinted on May 8 that he will take measures to counteract the strong currency and boost growth.

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The market had expected the central bank to reduce interest rates about 10-15 basis points, making the deposit rate negative for the first time. It had also expected ECB to give out longer-term loans to spur lending, without rolling out massive asset buys like the Bank of Japan. It had also expected the central bank to inject further liquidity into the region’s banking system.

Most dealers expect the euro to rebound if the ECB fails to meet the expectations.

“After those rate cut decisions, the market is anticipating further measures like stopping its sterilisation programme which will inject liquidity. Investors are also expecting it to announce asset purchases,” Alvin Tan, a currency strategist at Societe Generale, told Reuters.”What will keep the euro down is an asset purchase programme.”

Meanwhile, the US dollar index rose to 80.786, the highest level in four months. The dollar rose 0.2 percent to nearly 102.55 yen. The euro fell 0.4 percent to trade at 139.10 yen. To register for a free 2-week subscription to ForexMinute Premium Plan, visit www.forexminute.com/newsletter.

To contact the reporter of this story; Yashu Gola at yashu@forexminute.com