ECB's move boosts euro value

By Batuk Gathani

BRUSSELS, JUNE 9. The European Central Bank (ECB) has surprised the financial markets by raising the short-term interest rate by half a percentage point. The `daring move' has boosted the value of the euro against U.S. dollar to a two-month high.

The ECB's President, Mr. Duisenberg, said the move to boost the interest rate by half a per cent now `clears the horizon for some time to come' suggesting that the current fifth increase since November would be the last for a while.

The financial markets had anticipated an increase of a quarter per cent point to improve the euro value which sank to its lowest early March when it touched below the dollar 90 cent for the first time and lost some 22 per cent of its value against the dollar. The euro is currently trading between 95 and 96 U.S. cents and more optimistic perception in the markets is that by the end of the year it may reach a parity with it. Though this is a far cry from its launch value of 1.17 euro to a dollar on January 1, 1999, a sustained and consistent parity would be more acceptable to manufacturers and exporters in the 11-nation euro- zone area, which has recorded a healthy up-surge in its export performance in recent weeks.

For a while at least, the present rise could usher in a period of so-called `interest rate tranquility' in western financial markets. This is happening in the background of eerie nervousness and worry about the dollar's future health, whose perceived weakness could trigger further interest rate rise by the U.S. federal reserve.

With an impressive boost in exports due to a weak euro the euro- zone countries are heading for a plus three per cent economic growth rate by the end of the year. The inflation rate within the euro-zone region is hovering below two per cent mark and by all criteria the euro-zone economies are displaying robust health. This sentiment is further boosted by a modest drop in unemployment which may now average below 10 per cent mark.

It is in this background, financial markets on both sides of the Atlantic are hoping that the era of rising interest rates may come to an end with more stable currency exchange rates. The ECB officials have also reiterated their resolve and determination to forestall inflationary pressure. Some analysts think that the ECB is over obsessed with inflationary syndrome.

The business confidence in the euro-zone countries is high amid growing conviction that economic growth rate may even surpass the three per cent mark compared to 2.3 per cent last year. But many Europeans still worry about consequences of a sharp down turn in the U.S. which can trigger a major correction in the U.S. stock market with anticipated decline in the value of dollar and further boost in the U.S. interest rates. This is widely rated as a more pessimistic scenario, as financial analysts currently predict a minimum two and half per cent growth rate in the euro- zone region, even if the U.S. economy was to stagnate.

Today, the euro has appreciated by seven per cent since it hit a record low against the dollar last month.

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Section  : International
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