Thursday December 4, 06:05 PM
Euro bounces off lows after barrage of rate cuts
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LONDON (AFP) - A barrage of sharp interest rate cuts led by the European Central Bank roiled the forex markets Thursday but by late European trade the tone was calmer as the euro rose against the dollar and the British pound steadied.
Dealers said the pound suffered sharp falls against the dollar and hit record lows versus the euro in the run-up to the Bank of England's decision to cut its key interest rates by a full percentage point to 2.0 percent.
The currency then steadied when the ECB dropped its benchmark by 0.75 percentage points to 2.50 percent as Sweden, Denmark and New Zealand all took similar action to bolster their economies in the face of a deepening recession.
In late London trade, the euro was at 1.2835 dollars, up sharply from early lows of 1.2606 dollars and 1.2704 dollars in New York late Wednesday.
The dollar was also weaker at 92.83 year after 93.29 yen on Wednesday.
The pound was at 1.1521 euros, recovering from 1.1499 euros -- the lowest level since the creation of the European single currency in 1999.
Dealers said a series of very weak data pointed towards a deep recession in Britain, putting the pound under pressure ahead of the BoE's large rate cut.
British house prices slumped a record 14.9 percent in the three months to November and auto sales tumbled nearly 37 percent in the worst fall since 1980.
Central banks around the world have been slashing interest rates as the impact of the global financial crisis puts the brakes on economic growth.
Lower interest rates tend to weigh on currencies because they make them a less attractive investment in terms of yields but if they are judged to be supportive of the underlying economy, they can be taken positively.
Dealers said that more rate cuts are likely as the underlying economic problems are serious, with more pain to come, but at least the central banks appear ready to take whatever action is required.
"Talk of an (ECB) 0.75 points policy move had mounted ... over the past couple of days, but no one really believed in it, so today's decision has to be welcome," said Audrey Childe-Freeman (FREEMAN.HK - news) of Brown Brothers Harriman.
"This proves that the European monetary authorities are acknowledging that inflation is definitely yesterday's story and that the acceleration in the downturn of the economy needs to be addressed," Childe-Freeman added.
The 15-nation eurozone economy was confirmed to be in its first recession since its creation in 1999 in the third quarter, shrinking 0.2 percent after a similar contraction in the three months to June.
"Recently financial markets have been rewarding central banks that were willing to take bold measures, providing both equity markets and currencies with support," BNP Paribas (Paris: FR0000131104 - news) analysts wrote in a note.
In late London trade on Thursday, the euro changed hands at 1.2835 dollars against 1.2704 dollars late on Wednesday, at 118.27 yen (118.55), 0.8680 pounds (0.8599) and 1.5391 Swiss francs (1.5377).
The dollar stood at 92.83 yen (93.29) and 1.2080 Swiss francs (1.2103).
The pound was at 1.4680 dollars (1.4769).
On the London Bullion Market, the price of gold slipped to 773.25 dollars an ounce from 776.25 dollars late on Wednesday.
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