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Euro tumbles after ECB disappoints market

NEW YORK: The euro slumped after the European Central Bank left interest rates unchanged on Thursday, and even euro-friendly remarks from top European policymakers failed to improve gloomy market sentiment.

Traders said the decision to hold rates steady had disappointed those in the market who speculated overnight that the ECB might hike rates to help the flagging euro.

The European currency has lost close to 20 percent of its value against the dollar since its launch 14 months ago as investors favour the booming US economy over Europe.

"The fact that they didn't raise rates triggered weakness in the euro and we're still going to see more pressure," said John McCarthy, senior vice president at ING Barings.

"But it's not just a rate issue, it's also an issue of relative economic performance, with the US continuing to outperform Europe," he said.

Supportive comments from ECB President Wim Duisenberg failed to change the market's dim view of the euro.

Voicing his strongest support yet for the euro, Duisenberg said the central bank was concerned about inflationary risks stemming from a weak currency: "A strong euro is in the interest of Europe, so we are interested in a strong euro."

Duisenberg also strongly indicated higher interest rates are on the horizon, saying there was little doubt about the direction of the ECB's monetary policy.

Overnight, German Finance Minister Hans Eichel had fanned rate hike speculation when he called for a strong euro in an interview with the Financial Times.

But after a brief blip higher, the euro turned tail and hit the session's trough of 96.15 cents, its lowest level since it hit record lows near 94 cents on Monday.

The currency later pared losses to end at 96.42 cents, down nearly 1 percent from Wednesday's New York close.

The euro also briefly slipped to fresh day lows against the yen near 103.27 before paring its losses by the close.

The market remained on alert for possible central bank intervention to prop up the euro, and traders said dealing conditions were thin with some market players sidelined.

The euro's violent gyrations immediately after the ECB decision sent intervention jitters coursing through the market. This reaction by the market "tells people the market is somewhat irrational and dangerous," said a trader at a large European bank.

Meanwhile, the dollar rallied against the Japanese yen, recovering somewhat from Wednesday's 3 percent plunge to one-month lows.

But traders said that speculative buying, buoyant Japanese stocks and a year-end repatriation of yen would continue to support the yen.

"There's definitely some room for continued weakness in dollar/yen" said Ralph DelZenero, vice president at Banc One Capital Markets in Chicago.

At the close the dollar stood near 107.73 yen, just over half a percent above its prior close.

In other markets, the British pound languished near seven-month lows hit a day earlier, as sterling continued to be plagued by expectations that US interest rates will outstrip those in Britain. -Reuters