Euro to rise due to difference between ECB and Fed interest rates
Azerbaijan, Baku, April 11 (Trend corr. A. Badalova)
The euro-dollar rate will grow if the difference between the European Central Bank (ECB) and the Fed interest rates increases, Fredrik Erixon, the director of the European Center for International Political Economy (ECIPE), told Trend.
"The euro-dollar rate will be affected by these interest rates and if the difference increases rapidly, then we are likely to see the strengthening of euro," Erixon wrote in an e-mail to Trend.
At its meeting on April 7, the ECB increased its interest rate by 0.25 basic points to 1.25% in line with expectations.
Despite the increase, the euro rate decreased the day before due to ECB President Jean-Claude Trichet's statement that the current rise of is not the beginning of a series of increases.
The euro-dollar rate hit 1.4304 at market closing on Thursday.
In Erixon's opinion, the EU and the ECB are in a difficult situation.
"The ECB needs to start raising its rates. It should have done this late last year to get control over inflation," he said.
In March, the inflation rate in the eurozone reached its two-plus-year peak at 2.6 percent.
The pace of Germany's economic growth hit a record high of 3.6 percent last year.
According to Erixon, the increased discount rate puts pressure on lending costs for peripheral countries.
"The good news is that Portugal has finally admitted its needs a bailout, which means the ECB can raise the interest rate without being afraid of forcing countries into a bailout," Erixon said. "Greece and Ireland have sovereign credit for the next few years, but increasing interest rates will increase their trouble with economic activity and with banks that need restructuring."
Meanwhile, according to Capital Economics, a leading UK consulting company, although the ECB may make one or two small hikes, rates in the eurozone are likely to remain relatively low for a long time. The ECB will increase its interest rates gradually.
"Even a modest tightening of the monetary policy would damage the periphery," the analysts said.
In their opinion, the current raise of ECB interest rates is not one-time.
Rates will also likely be increased in July before the slowdown of economic growth in peripheral countries is stopped by normalization processes in the region.
However, there is a risk that the ECB will continue to raise its interest rates, something that will bring serious consequences for the whole region, according to the analysts.
If they increased their rates, this doesn't mean other central banks would tighten their monetary policy -- particularly, the Fed.
"The Fed is largely concerned with the negative aftermath of high prices for business and trade and, hence, middle-term prices, not inflation growth-related risks of secondary effects," the analysts said.
The Fed's basic interest rate is currently at a record low, oscillating from 0 percent to 0.25 percent annually.
According to the analysts, the dollar-euro rate will reach 1.45 euro per $1 in the second quarter, and reduce to 1.4 euro per $1 in the third quarter and 1.3 euro per $1 in the fourth quarter. The dollar-euro rate will be equal in 2012, they report.