LONDON (CNNfn) - Controversial German finance minister Oskar Lafontaine resigned late Thursday, in a move that sent shockwaves throughout Europe.
European currencies and bonds immediately strengthened in U.S. trading, as investors guessed his departure would give the European Central Bank more scope to cut interest rates. As Germany's finance minister, Lafontaine also served on the board of the ECB.
German government futures bounced 60 basis points on the news, and the euro strengthened by more than a cent against the dollar to trade at over $1.10.
"Lafontaine was seen as the arch-exponent of the hard left in Germany," said Holger Schmieding, an economist with Merrill Lynch in London. The greater power given to Chancellor Gerhard Schröder, once a rival with Lafontaine for the leadership of the SPD party, "will be seen as good for business," added Schmieding.
Lafontaine has made several controversial calls for the ECB to lower rates to prevent rising unemployment in Europe's slowing economies. The ECB refused to budge on his demands, fearing that it would lose its reputation for political independence.
Germany's coalition government, which only came to power last September, has been involved in a series of embarrassing battles with the corporate sector. Several of the country's blue-chip corporations have threatened to leave Germany in protest of new tax policies and the government's attitude to new environmental legislation.
The strife between Bonn and Frankfurt, Germany's financial capital, should ease now, said analysts, and "any conflict with the ECB will be much less open" according to Merrill Lynch's Schmieding.
Analysts said more resignations could follow.
Earlier Thursday German chancellor Gerhard Schröder denied he threatened to resign at a cabinet meeting, unless his colleagues stopped making anti-business comments.
Schröder accepted Lafontaine's resignation and thanked him for his work. The Chancellor has called a press conference for later Thursday, at which he is expected to announce Lafontaine's successor.