The euro declined sharply today against the dollar after Bundesbank chief and member of European Central Bank governing council Jens Weidman revealed that the bank would consider, among other measures, negative interest rates in order to offset the strong advances by the 18-nation currency.
Also contributing to the drastic fall of the euro was data released by Ifo Institute that showed German business confidence fell. Weidman did not rule out the possibility of purchasing assets from banks to help ease deflation, as the Germany’s central bank marks a u-turn from its strict policy on quantitative easing.
The euro plunged 0.2 percent to $1.3808, after surging on Monday amid speculation that German firms were bringing profits earned overseas home and that a big sovereign investor had purchased the euro to shore up the currency’s reserves.
On the other hand, the Indian rupee touched its highest level in nearly 8 months as the investor optimism that the new government will stimulate growth soared.
Weidmann’s remarks on negative deposit rates, also called sub-zero borrowing costs, may mean lenders will pay to hold their monies at the ECB overnight. The result of this is that the euro will be less-attractive to hold on to, and hence will be used to finance investments in assets with higher yields, lowering its value.
Antonio Tajani, the European Commission vice-president for industry recently voiced concerns that the euro is too strong at $1.40
“All the comments are a pre-emptive move by ECB officials to prevent a rapid appreciation beyond $1.40,” Ian Gunner, Altana Hard Currency Fund’s Portfolio Manager told Reuters. “It suggests that they are concerned about the euro but there is no consensus about future policy action.”
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