NEW YORK: The euro briefly fell back below parity with the dollar on Thursday after the European Central Bank (ECB) raised interest rates, and US data showed that the world’s biggest economy rebounded more than expected in the third quarter.
The ECB raised its deposit rate by 75 basis points to 1.5%, the highest since 2009, in an effort to prevent rapid price growth from becoming entrenched, with further hikes almost certain as it unwinds a decade’s worth of stimulus.
ECB President Christine Lagarde said that while Russia’s invasion of Ukraine and other global uncertainties meant the euro area economy faced a number of risks to the downside, inflation risks were skewed upward.
The euro, which had hit a one-month high of $1.0094 versus the dollar earlier in the day, tumbled back below parity with the greenback after the ECB rate decision. The single currency clawed back some of its losses against the strong dollar, and was down 0.69% at 1.0011 at 9:50 EDT (1350 GMT).
“The dollar is rebounding in light of the stronger-than expected data and the ECB emphasizing a gloomy outlook for the eurozone economy,” said Joe Manimbo, senior market analyst at Convera. “It’s a reminder that nothing fundamentally has changed in terms of the euro, and negative fundamentals have put renewed pressure on the single currency.” US gross domestic product rose at a 2.6% annualized rate last quarter, the government’s advance GDP estimate showed on Thursday, ending two straight quarterly decreases in output, which had raised concerns that the economy was in recession.
Economists polled by Reuters had forecast GDP growth rebounding at a 2.4% rate.
Still, there were concerns that the data overstates the economy’s health as the Federal Reserve’s aggressive interest rate increases curbed consumer spending.
“Despite the shiny headline number, a look under the hood shows a much grimmer picture of the US economy, one that is clearly losing steam,” said Douglas Porter, chief economist at BMO Capital Markets. “With the full effect of past and future Fed rate hikes still to be felt, the economy appears poised for a modest downturn in the first half of next year.” The Fed is expected to raise rates at its Nov. 1-2 meeting by 75 basis points to 1.5%, a 13-year high. It is also likely to reel in a key subsidy to commercial banks.
“I think that a bit of profit-taking at this level is not unheard of,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. “Since Monday, the euro-dollar has gone up around 2.2%, so we’ve had quite a big move in the dollar over the last two days.” The greenback had slid in recent days as investors have cheered signs that the US Federal Reserve is considering slowing down its aggressive rate hikes in December. Yet reversal on Thursday was a natural bounce after a steep decline, analysts said.
The British pound was down 0.24% against the greenback to $1.1599 following a two-day rally on the back of Rishi Sunak being appointed prime minister.
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