Euro falls from 1-month high against the US dollar

The euro fell from a one-month high against the US dollar in early trade yesterday as the market continued to digest a European Commission report released on Monday, which forecast a deepening recession in the 16-nation region. It predicted a 4% contraction in the eurozone this year and growth of just 0.1% in 2010, therefore making a 25 basis point interest rate cut by the ECB to 1% tomorrow increasingly likely. However, what is less clear is whether the central bank intends to embark on a quantitative easing program similar to that of the US Fed or Bank of England to stimulate the recession-hit eurozone. Adding to the uncertainty, Greek ECB council members Athanasios Orphanides and George Provopoulos said yesterday that they would not rule out slashing interest rates below 1% and buying debt to pump money into the economy. As a result, speculation surrounding what measures the central bank will announce tomorrow made investors increasingly cautious about how long the region’s recession will last, and they therefore bought into the perceived safe-haven of the greenback.

The US dollar also gained strengthen against the euro as concern surrounding the results of US “stress tests” decreased demand for the euro. News that Bank of America Corp. may need $34 billion in new capital, according to those close to the tests, induced a flight to safety as investors looked to reduce risk. It is thought that as many as ten out of the nineteen financial institutions tested by US government officials would require extra capital should the recession deepen, although Bank of America is thought to face the largest need. The formal results are due for release tomorrow.

Early in the afternoon, however, the dollar’s gains were reduced against the single currency after Federal Reserve Chairman Ben Bernanke said the contraction of the US economy may be easing. Giving evidence before the congressional Joint Economic Committee, Mr. Bernanke gave no indication that the Fed intends to withdraw from its unprecedented policy of keeping interest rates at virtually zero and boosting credit through emergency-loan programs and asset purchases. The greenback’s morning gains were also capped by a better-than-expected report released by The Institute for Supply Management in the US midway through the afternoon. It showed that in April, American service industries, which make up almost 90% of the economy, contracted at their slowest pace for six months, indicating that the economic slump may gradually be abating. Although anything less than 50 still represents a contraction, the index rose to 43.7 last month from 40.8 in March. Nevertheless, the dollar finished the day up against the euro at 1.3328.

In early trading today, the euro has continued its slide against the greenback, as investor wariness over tomorrow’s US “stress test” results and the ECB’s interest rate decision continues. At 10.00 BST, Month-on-Month and Year-on-Year Retail Sales data for March is due in the eurozone, whilst at 13.15 BST ADP Employment Change figures for April are due in the US.