The euro has staged one of its biggest intra-day rallies following the sell-off prompted by the unexpected US interest rate cut and stable rates in the euro zone.
The currency rose rapidly as investors bet European growth would outstrip the US even after the rate cut. It accelerated again after a report showed French consumer confidence rose unexpectedly last month. The figures and the lack of movement from the European Central Bank (ECB), which left interest rates unchanged at 4.75 per cent, suggested strength in Europe's economy, while the Fed's rate reduction highlights investors' concern about US growth prospects. The ECB president Mr Wim Duisenberg gave no press conference to explain the decision after the meeting of the Bank's governing council, which took place by teleconference.
The euro rose almost 2 per cent to $0.9496 by the end of New York trading, from $0.9279 on Wednesday. At one point, it surged 2.59 per cent, its second largest intra-day gain. Germany's Trade Union Federation condemned the ECB's inaction as "simply irresponsible" in view of mounting evidence that economic growth in the euro zone is slowing. Mr Heinz Putzhammer, a member of the federation's executive, said unions had exercised wage restraint in order to facilitate the low interest rates that would boost consumer spending.
"If the ECB is not prepared to cut interest rates now, then when?" he asked.
Some economists blame the ECB for dampening growth in the euro zone by increasing interest rates too sharply last year. These critics argue that the two main causes of inflation, the weakness of the euro and the rise in oil prices, have proven to be more temporary than the ECB predicted.
For the same reason, many economists expect the US economy to pick up again in the second half of this year. According to Mr Jim O'Leary, chief economist at Davy Stockbrokers, the US has been badly affected by oil prices, the strong dollar and high interest rates. "All of these will at least unwind if not disappear completely over the next six months."
He added that the euro may climb as high as parity against the dollar but is unlikely to go much further as US growth once again starts to rival that of the euro zone later in the year.
Although the euro's recovery on financial markets offers the central bankers greater leeway to cut rates, few market analysts believe that the ECB will move soon. Even if, as expected, the US Federal Reserve cuts interest rates a second time within the next few weeks, the ECB believes inflation remains a bigger threat in the euro zone.
The ECB is solely concerned with maintaining price stability. The effect of monetary policy on economic growth is at most a secondary issue.
Most market analysts believe the ECB will continue its wait and see policy for the first half of this year and that an interest rate cut will come later rather than sooner. Mr Duisenberg and his colleagues are concerned that last year's euro weakness and high oil prices could transfer into second round effects that will push up prices.
In view of these concerns, Mr Michael Heise, chief economist at DG Bank in Frankfurt, predicts the ECB will find it impossible to cut rates within the next few weeks.
"They couldn't make a successful argument for it," he said.
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