Thursday, June 5, 2014

Global Economy: Why The European Central Bank Wants To Crush The Euro Rally

(Drivebycuriosity) - This morning the European Central Bank (ECB) announced a bold move. She cut her deposit rate to minus 0.1%. European Banks earn now a negative interest rate for their deposits at the ECB. Furthermore, the rate that banks pay to borrow from the central bank was reduced to 0.4%.

I think the ECB tries to curb to the stubbornly strength of the Euro. Since autumn 2012 the European currency had been in an upwards trend contrary to the sluggish European economy and the political problems there. Since then the Euro gained around 20 cents calculated in US Dollars (+ 16%) and climbed around 5% in the recent 12 months - even that the currency gave up 4 cents since begin of May as today´s step has been expected and priced in.

The climbing Euro since autumn 2012 had reduced prices for imported goods - including oil and other commodities calculated in Euros. Therefore the Euro strength lowered the European inflation rate. A further strengthening of the Euro could have caused deflation (falling prices). The rise of the Euro also made European products more expensive on the global markets and caused headwinds for European exporters which slowed the already sluggish European economy.

Now the ECB is trying to devalue the Euro - at least to curb the upwards trend - by lowering European interest rates which should reduce the appetite for holding Euros. The outcome is uncertain because currency rates are also influenced by economic growth and political issues which could overcompensate the influence of the interest rate policy. But in the recent weeks the Euro rally took a break - so far.

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