NEWS AND COMMENTARY
October 5, 2000
Dollar Declines Against Euro After European Rate Boost
A WSJ.COM News Roundup
Stronger Euro Won't Boost Profits for U.S. Companies ... Weiss comments
NEW YORK -- The dollar slid against the euro Thursday after the European Central Bank raised interest rates just two weeks after a global intervention to support the single currency.
In early-morning trading in New York, the euro traded at 87.73 U.S. cents, up from 87.45 U.S. cents late Wednesday in New York. Before the rate increase was announced, the euro traded modestly lower against the dollar.
The dollar traded at 109.27 yen, down from 109.39 yen late Wednesday. The pound bought $1.4563, down from $1.4593 late Wednesday.
In a bit of a surprise, the European Central Bank raised its key interest rates by a quarter-percentage point, the sixth time the central bank has raised rates this year.
When the bank last raised rates in late August, it hinted further increases would be made before the end of the year. But most analysts hadn't expected a boost at Thursday's meeting.
The rate increase could be interpreted as being supportive of the euro following the intervention two weeks ago to support the currency, which before the intervention sank to a series of lows against the dollar and the yen. However, some analysts fear that a boost in interest rates could hamper European growth, especially at a time when energy prices have been soaring.
The European Central Bank's marginal lending rate and deposit rate now stand at 5.75% and 3.75%, respectively. The central bank also raised its minimum bid rate to 4.75%. The rate is applied at its weekly main refinancing operations -- the central bank's most important open-market facility.
The rate increase could support the euro because it narrows the gap with U.S. interest rates, making euro-denominated assets more attractive, and because it signals central-bank officials are upbeat about the euro-zone's growth prospects. Euro-zone officials repeatedly have said the euro's valuation doesn't reflect the region's economic fundamentals.
Even though many U.S. companies blamed the euro for their dismal earnings in the third quarter, a boost in the euro will not help improve company earnings now. This is because the European economy is showing signs of a general slowdown in growth and demand. In addition, the oil price shocks of the past few months have exacerbated the slowdown. Profits for U.S. companies relying on European business are going to suffer even more in the fourth quarter.
A stronger euro also means that euro-denominated assets are more attractive to investors. We've already seen a steady stream of European capital taking flight from the U.S. back to Europe. That stream will turn into a flood as the dollar weakens and inflation seeps into the economy. The Fed will not be able to stand on the sidelines when this happens.