Euro rises vs dollar after ECB keeps rates flat

AP News
Posted: Oct 06, 2011 4:09 PM
Euro rises vs dollar after ECB keeps rates flat

The euro rose against the dollar and other currencies Thursday after the European Central Bank kept interest rates unchanged despite a growing economic crisis. Experts say the euro's rally will likely be short-lived.

The euro rose to $1.3429 at 3:05 p.m. Eastern time from $1.3351 late Wednesday.

The ECB said it will leave its key interest rate at 1.5 percent, but will make emergency loans to European lenders. Many had expected the central bank to cut rates to encourage lending and investment. Europe's economy is barely growing.

Lower rates would make the euro less attractive to traders by reducing the returns from fixed-income investments such as government debt.

The euro has been rising against the dollar since fears of a default by Greece pushed it to a nine-month low on Monday. Many analysts expect the euro to resume its decline, falling to or below $1.30 before the end of the year. Strategists with Bank of America Merrill Lynch lowered their year-end forecast to $1.30 last week. Capital Economics forecasters say it will hit $1.10 by 2013.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, said the euro's rally this week was a result of speculators exiting short-term bets against the currency.

Traders who expected a rate cut by the ECB had bet against the euro by short-selling euro futures, Chandler said. Short-selling is the practice of selling an investment without owning it in hopes that the price will go down.

Positive news about the European debt crisis made people nervous that the euro would rise in the short term, causing large losses on those bets, Chandler said. He said traders had to buy euros to exit their bets against the currency.

Chandler expects the euro to keep sliding because it has fallen more sharply in recent weeks than it did over the past year or so. Traders generally take that as a signal that an investment is on a longer downward trend.

"The trend for the medium term has turned negative," Chandler said. He expects the euro to fall to $1.29 by the end of the year.

The euro also rose strongly against the Japanese yen, the British pound and the Swiss franc.

In other trading, the pound fell to $1.5431 from $1.5467 late Wednesday. It dove to $1.5297 early Thursday after the Bank of England surprised traders with a plan to inject $116 billion into the British economy.

The ECB's bond-buying will increase the money supply, diluting the value of pounds held by traders. It will likely reduce interest rates, which also hurts the pound.

The dollar fell to 76.61 yen from 76.71. The yen has become a favorite of investors seeking a safe place to stash their money.