Euro rises against US dollar following ECB decision

After initially losing ground early in the day, the euro rose strongly against the US dollar yesterday after the European Central Bank announced a cut in interest rates to 1% and its intention to embark on a quantitative easing program, which buoyed investor mood. President Jean-Claude Trichet’s announcement that the ECB is to buy £53.6 billion of euro-denominated covered bonds, used largely to finance mortgages in Europe, improved investor confidence that an economic recovery in the region may soon be underway. Trichet described the central bank’s plan to buy debt as “credit easing” at a press conference in Frankfurt, promising more details of the purchases next month. This puts the ECB on a similar path to the one already taken by the US Fed and the Bank of England. Following the ECB’s decision risk appetite improved and investors bought back into the higher-yielding euro, selling off the “safer” US dollar.

This bullishness continued into yesterday afternoon after better-than-expected US jobless claims data and German manufacturing figures further encouraged investor sentiment that the global economic slump is bottoming out. Elsewhere, the results of US government “stress tests” on nineteen major American banks did little to dent demand for the single currency. The US government ordered ten of the banks tested to raise $74.6 billion by November 9th in a bid to ensure they have sufficient capital should the recession get even deeper. Bank of America, Citigroup and Morgan Stanley were all ordered to raise more money, however JPMorgan Chase, Goldman Sachs and American Express will need to raise no additional capital. Interestingly, despite this being less than positive news, investors did not react to the results by buying into the perceived safe-haven of the dollar, with many instead viewing the results as clearing up a lot of the current uncertainty in the market. The euro finished the day up at 1.3388.

In early trading today the euro has continued its rise against the dollar, as investor appetite for risk continues. In the eurozone today, German Month-on-Month and Year-on-Year Industrial Productions data for March is released at 11.00 BST, whilst in the US, 13.30 BST sees the release of April’s Nonfarm Payrolls, Unemployment Rate and Average Weekly Hours figures. Also out at that time in America is the Month-on-Month and Year-on-Year Average Hourly Earnings for April.