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ECB faces rate dilemma
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April 25, 2000: 10:38 a.m. ET
Euro hits new low, pressuring bankers to prop up ailing currency
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LONDON (CNNfn) - The euro-currency zone's financial bigwigs meet Thursday for their bi-weekly deliberations, amid intensifying pressure to act as the euro plummets to new troughs against the dollar.
The governors of the European Central Bank face the unenviable task of attempting to halt the free-falling single currency. Few analysts give them a prayer.
On the one hand the ECB doesn't want to be seen to be interfering in the markets, yet with the euro fast approaching the $0.90 level the bank will come under all sorts of political encouragement to brake the dollar's ascent.
The euro hit a new nadir of $0.9265 Tuesday, and a new low against sterling. So should the ECB raise rates, or continue to exercise a policy of benign neglect? It doesn't matter, according to some economists. 
"Whatever happens the euro will fall," Ken Wattret, senior economist at BNP Paribas in London told CNNfn.com. "Even an aggressive move - half a percentage point - wouldn't help, and then they'll have used all their ammunition up."
The ECB, in its tumultuous 16-month reign as the arbiter of European monetary policy, has steadfastly refused to be seen as the guarantor of the ailing euro. But analysts say the day may finally be here when the bank has to step into the breach by pumping cash into the market to prop up the currency.
Analysts are divided over the prospect of a rate cut Thursday, but only over the timing of such a move; everybody agrees rates will rise. The ECB raised rates a quarter of percentage point to 3.5 percent on March 16.
A slide below $0.90 would leave the euro in peril. Traders say that below that figure there is little sign of support, leaving $0.85 as the short-term target.
Claudio Piron, a treasury economist at Standard Chartered Bank in London, predicted the ECB would leave rates unchanged Thursday, because it realizes simple changes in interest rates won't affect the fundamentals: the U.S. economy is outperforming its European rival. 
"Can interest rates shore up the euro? Not so far, " said Piron. He calculated the ECB could begin intervening in the currency markets (selling dollars for euros) when the rate gets between $0.90 and $0.85. However, that would provide, at best, short-term relief.
"It really requires joint intervention (with the U.S. Federal Reserve), and no U.S. official is going to sanction that in a presidential election year."
Piron and Wattret are in agreement that there is but one factor guaranteed to bale out the euro: an end to the U.S. economy's boom. Evidence of a cooling is unlikely to come before the third quarter of 2000, so at least until then the euro seems certain to remain in the doghouse. 
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European Central Bank
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