NEW YORK: The euro touched a four-month peak against the US dollar on Thursday after the European Central Bank cut interest rates for the sixth time in nine months, as expected, but revised higher its near-term inflation forecast.
The single European currency rose 0.5% to $1.0848, after earlier hitting a four-month high of $1.0854. The euro has gained 4.5% so far this week, set for its biggest weekly jump since May 2009.
Germany is ramping up spending, with a massive 500 billion euro ($540.90 billion) special fund sought for infrastructure and plans to increase defense investment long-shackled by rigid borrowing rules. Hefty government spending, which can be supportive for growth overall, can also exacerbate price pressures. Measures of longer-term inflation in the euro zone have already surged from around 2.05% early this week to 2.24% by Thursday, an unusually large shift. The ECB has raised its inflation forecast to 2.3% this year, above the 2.1% seen three months ago.
The dollar, on the other hand, continued to struggle on Thursday, as the United States under the Trump administration pressed ahead with planned tariffs that have raised fears of a prolonged global trade war that could have severe repercussions for economic growth and inflation.
For now, the attention is on Europe amid a Bund sell-off that saw the 10-year benchmark yield on Wednesday post its biggest daily rise in more than 25 years.
“The ECB is likely to be fairly cautious of treading such new ground and higher interest rates may prevail as a result,” said Lindsay James, investment strategist, at Quilter in London.
A big focus for investors is the expected impact of Germany’s huge spending plan on ECB monetary policy. ECB President Christine Lagarde, in a press conference, said the spending proposals would boost European growth.
But she noted that the ECB needed to be “attentive, vigilant” and to understand how it was going to work. “What the timing will be, what the financing will be so that we can then draw the conclusions and appreciate how much it will contribute to growth and what impact it would have eventually on inflation,” she said.
Across the Atlantic, the dollar index, which measures the greenback against six peers, was on a four-day losing streak on Thursday, falling to a four-month low. It was last down 0.4% at 103.88.
Trump’s administration, which has slapped tariffs on Canada, Mexico and China, gave a one-month reprieve on auto import levies to its nearest neighbors, again showing how rapidly the trade landscape can shift.
“It is clear that in the case of a deepening US slowdown, ongoing good news from Europe and noisy US tariff policy could add fuel to the fire,” Barclays analysts wrote in a research note.
The greenback fell 0.5% against the Canadian dollar to C$1.4272. Canadian Prime Minister Justin Trudeau said on Thursday that Canada would continue to be in a trade war with the United States for the foreseeable future. He would continue to engage with senior Trump administration officials about the tariffs on all Canadian imports, he said.
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