Euro strengthens against dollar over possible Fed rate hike

Euro strengthens against dollar over possible Fed rate hike
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First Published: Thu, Mar 22 2007. 09 56 AM IST
Updated: Thu, Mar 22 2007. 09 56 AM IST
Reuters
New York: The dollar tumbled to a two-year low against the euro on 21 March after the Federal Reserve held interest rates steady but dropped a reference in its statement to possible further interest rate increases.
Though the Fed reiterated that inflation remains a concern, investors interpreted the language change as a sign that an interest rate cut may be near.
The euro shot up to $1.3390 (Rs58.39), its highest since March 2005, after the statement’s release, before settling around $1.3385, up 0.5% since late on Tuesday.
The dollar also weakened against sterling and high-yield currencies such as the Australian dollar.
The euro got a particular jolt because markets expect more euro zone interest rate hikes this year from the current 3.75%.
The dollar fared best against the low-yielding yen, paring gains to 117.55 yen after hitting a peak of 117.95 yen earlier. Japanese interest rates are just 0.5%.
Meanwhile, the US government debt prices rebounded on 21 March after investors read the Federal Reserve’s policy statement as signaling its next move may be to cut interest rates.
As bond traders bet a rate cut might happen sooner than previously thought, yields of short-dated maturities, which respond closely to expectations for central bank rate moves, dropped sharply, falling briefly below long maturities’ yields for the first time since August. That returned the “yield curve” to an upward slope.
Two-year note yields dropped about 11 basis points since the Fed decision to 4.528%, with the price up 5/32.
Benchmark 10-year notes yields were at 4.534%, with the price up 5/32. Bond yields and prices move inversely.
US short-term interest rate futures shifted to show a 48% chance of a rate cut by the end of June, up from a 26% chance shown before the Fed announcement.
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First Published: Thu, Mar 22 2007. 09 56 AM IST
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