eur fundamentals

Euro Pulls Back Sharply Against Greenback as ECB Cuts Deposit Rates, Raises Emergency Lending Costs

Thursday, 18 December 2008 23:43:30 GMT  |  Terri Belkas, Currency Strategist

The euro and Swiss franc tumbled against the US dollar on Thursday as the European Central Bank cut the interest rate paid on bank deposits with the ECB overnight and increased its emergency lending rate. These moves were intended to prevent financial firms from hoarding cash and meant to push them to lend to each other and boost liquidity. The measures will go into effect after January 21, 2009, and it will be interesting to see what sort of impact this has on the markets, if at all. Indeed, the ECB is essentially betting that conditions have stabilized enough to allow the financial markets to operate on their own, but if this is not the case, the credit markets could feel the repercussions immediately. Until then, traders will be focused on the US dollar and outlooks for the ECB next rate decision on January 15. According to Credit Suisse overnight index swaps, the ECB will cut rates by at least 50bps to 2.00 percent, and these expectations could fuel additional declines in EUR/USD toward the 38.2 percent retracement level of 1.2549 - 1.4720 at 1.3891.

Related Article: Euro Weekly Forecast

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