A strengthening euro currency could put into question further European Central Bank interest rate increases after June, central banking sources have been reported as saying.
According to Market News International, one source was quoted as saying that a euro/dollar rate of $1.45 was the pain threshold for the central bank, while another said a rapid rise to $1.40 would be alarming.
Right now, it would take a "major earthquake" to stop the ECB's next rate hike, according to one official, while a senior euro zone political official who meets regularly with the ECB said a June hike looks likely, bar a foreign exchange shock.
So far the understanding from the ECB was that they would raise rates one more time, and the signals suggested June," this official was quoted by Market News as saying. "But if the euro keeps rising, they would probably wait."
The euro last week reached a new record high against the U.S. dollar of $1.3683 and it has risen 5 per cent against the dollar in the past three months. It was trading at midsession on today at around $1.3605.
Yet another unnamed senior official was quoted as saying that the recent rise of the euro had reduced the prospect for further rate increases beyond the summer. "Market expectations for a June hike could be correct. But if the European currency strengthens, then reasons for further rate increases would be diminished," thr source said.
MNSI said one analysis making the rounds in euro zone banking circles says that a euro-dollar rate of $1.40 looks increasingly attainable.
According to a central banking source, the euro zone is in a better position today to absorb a stronger currency than it was when it hit $1.36 a few years ago. "While the economy is showing such dynamism, especially in Germany, then the high euro is something that can be accommodated," the source told MNSI.
"And of course there are still worries that inflation will feed through next year, especially with core inflation at 1.9 per cent and with the recent rise in oil not showing up yet."