The single currency declined to a one-month low of 1.3025 against the dollar as European Central Bank President Jean-Claude Trichet signaled policy makers are not finished cutting interest rates although euro traded in a volatile manner after ECB lowered its main refinancing rate by 50 basis points to 2% as expected.
Euro initially rebounded to 1.3244 versus the greenback after Trichet said ECB’s next key ‘rendezvous’ will be in March, adding speculation that ECB may keep interest unchanged in February, however, the single currency tumbled to 1.3025 as Trichet said later in the day that ‘we did not say it was now the limit and we would not move any more’.
A widening spread between two- and 10-year German government bond yields suggested investors increased bets the ECB will be forced to make further cuts in borrowing costs.
The greenback fell initially to 88.48 on risk aversion due to the selloff in global stock market before rebounding to 89.90 as U.S. stocks rebounded in late U.S. session as Fed Board Nominee Daniel Tarullo said deflation is more of a concern at the moment than inflation and indicate the central bank's strategy for unwinding its various lending programs and adjusting monetary policy would be an 'exercise in innovation'.
Friday will see the release of eurozone trade balance, U.S. CPI, real earnings, foreign treasury buys, net long-term TIC flows, industrial production and University of Michigan survey.