The European Central Bank cut its benchmark rate 50 basis points (0.50%) to 2% because of weakness in the Eurozone. While a cut was widely anticipated, it was not known whether the ECB would cut 25 or 50 basis points. However, the cut of 50 basis points ended up confirming the prevailing view that the ECB is behind the curve. As a result, the Euro weakened against the Japanese Yen and the U.S. Dollar.
I have said I expected the Euro to rise to as high as $1.55 this year. However, it is now at $1.31, largely because it is now generally believed that the ECB will join the BoE, BOJ, and the Fed in a zero interest rate policy as the Eurozone has become weak. So the prevailing calculus now is that economic weakness is giving the lie to the ECB’s prior position of being “trapped” by low interest rates.
For now, I am sticking with my forecast – predicated on the ECB not going to zero. However, if the ECB does join Japan, the U.K., Switzerland and the U.S. at zero, the Euro is probably not going higher.
Originally published at Credit Writedowns and reproduced here with the author’s permission.