The euro has had its biggest one-day fall in more than six weeks before rebounding as some traders began to speculate that the European Central Bank (ECB) will refrain from cutting interest rates tomorrow.
The currency fell to a two-week low of $0.9034 from $0.9114 late on Monday as currency traders in particular focused on stronger-than-expected money supply growth in the euro zone. However, it later gained some ground closing at $0.9120 after far weaker than expected US consumer confidence.
Money supply growth, which is often seen as a predictor of future inflationary pressures, accelerated for a fourth consecutive month in July.
Controlling inflation is the ECB's main priority and the accelerating money supply growth makes it less likely to cut interest rates according to many traders.
"This does not help the ECB's case for cutting rates on Thursday," said Ms Francesca Fornasari, a currency strategist at Lehman Brothers. "It will be a very close call. However, on balance Lehman Brothers still expects the ECB to cut a quarter of a percentage point off interest rates.
The M3 measure of money supply grew at an annual pace of 6.4 per cent, up from 6.1 per cent in June, the ECB said, and well ahead of the its 4.5 per cent target.
However, in what is seen as a bid to persuade the markets that rate cuts are still on the agenda, the Bank said the figure was "distorted upwards" by three quarters of a percentage point.
But it is still more than 1 percentage point above the target even after accounting for the distortion.
According to Mr Jim Power, investment director at Friends First, the Bank is nevertheless likely to opt for a small rate cut on Thursday.
That is likely to further bolster the euro, he added. He noted that currency traders had taken the money supply data at face value but that the interest rate markets were still pricing in an imminent rate cut.
He pointed to US consumer confidence which fell to its lowest level in four months in August as job loss announcements took their toll.
But others believe that the ECB may wait for its next meeting on September 13th to cut rates and only attempt to set up the markets at the press conference this week.
Postponing the decision would have the advantage that the media would be forced to focus on the unveiling of the euro notes by ECB president Mr Wim Duisenberg at the same press conference tomorrow.
