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The euro hit a new all-time high of 1.3880 usd on further evidence that the European Central Bank is sticking to its hawkish stance just as the US Federal Reserve is widely tipped to cut its
benchmark interest rate.
This divergence between the two central banks pushed the euro to an all-time high earlier this morning and the dollar index has now fallen below its 1995 lows and is only 1.5 pct away from its Sept 1992 low of 78.19.
"The dollar is under significant pressure....the main drivers of dollar weakness appear to be collapsing short-term interest rate differentials as markets look to a series of reductions in the Fed funds rate and a related rise in risk appetite," said Steve Pearson, currency strategist at HBOS.
The most explicit hawkish comments from the ECB came yesterday when thecentral bank's president Jean-Claude Trichet stated that investors who"behave improperly will have to pay the price of their mistakes".
Analysts said this sort of rhetoric suggests that the ECB is nowhere nearcutting interest rates in the current liquidity crisis for fear ofundermining hard-won economic stability even if the US Federal Reserve, aswidely expected, cuts its benchmark funds rate a quarter point next Tuesday.
"If the ECB's hawkish tone continues however, the realisation that ECBpolicy has decoupled from the Fed, will imply that the euro strengthens evenfurther," said Stuart Bennett, analyst at Calyon.
Overall, currency markets remain dependent on the level of risk appetitein the markets overall, and in particular, are tracking equities. Rising stocks have allowed the dollar to rise against the yen as anincreased appetite for risk promotes the carry trades, while at the same timethe euro moves higher against the dollar.
benchmark interest rate.
This divergence between the two central banks pushed the euro to an all-time high earlier this morning and the dollar index has now fallen below its 1995 lows and is only 1.5 pct away from its Sept 1992 low of 78.19.
"The dollar is under significant pressure....the main drivers of dollar weakness appear to be collapsing short-term interest rate differentials as markets look to a series of reductions in the Fed funds rate and a related rise in risk appetite," said Steve Pearson, currency strategist at HBOS.
The most explicit hawkish comments from the ECB came yesterday when thecentral bank's president Jean-Claude Trichet stated that investors who"behave improperly will have to pay the price of their mistakes".
Analysts said this sort of rhetoric suggests that the ECB is nowhere nearcutting interest rates in the current liquidity crisis for fear ofundermining hard-won economic stability even if the US Federal Reserve, aswidely expected, cuts its benchmark funds rate a quarter point next Tuesday.
"If the ECB's hawkish tone continues however, the realisation that ECBpolicy has decoupled from the Fed, will imply that the euro strengthens evenfurther," said Stuart Bennett, analyst at Calyon.
Overall, currency markets remain dependent on the level of risk appetitein the markets overall, and in particular, are tracking equities. Rising stocks have allowed the dollar to rise against the yen as anincreased appetite for risk promotes the carry trades, while at the same timethe euro moves higher against the dollar.
