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Rate hike won't save euro
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August 28, 2000: 10:10 a.m. ET
ECB's quarter-percent rate increase already priced into market, analysts say
By Gordon Platt
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NEW YORK (CNNfn) - It will take more than a quarter-percentage point rate rise on Thursday to turn the slumping euro around, analysts warned.
The European Central Bank will raise rates by 25 basis points (one-quarter percentage point) for sure on Thursday, and possibly by 50 basis points, said David Gilmore, partner at Foreign Exchange Analytics, Essex, Conn.
ECB officials are worried not only about the weak euro, which is hovering just above its record low, but also with a flare-up of inflation at the wholesale level.
 "The chart of oil priced in euros is not a pretty picture," Gilmore said.
A quarter-percentage point rate hike on Thursday, when the ECB next meets, is already priced into the market and is not likely to give the euro much of a boost.
"It looks like it will be a case of history repeating itself," Gilmore said. "The euro will head downhill after the rate rise."
The ECB has tightened aggressively since last November, and this has done nothing to halt the euro's slide, said Bob Lynch, currency strategist at BNP Paribas.
"I wouldn't be overly optimistic that a rate hike on Thursday will help the euro," he said. "It will do nothing to arrest the bigger story, which implies additional euro weakness."
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Lynch said it is helpful to look at the bigger picture. "Higher rates will dampen growth, which would be negative for the euro," he said.
The ECB is unlikely to raise rates by 50 basis points (one-half a percentage point) on Thursday, he added. "I don't know that the situation is so dire that they have to hike 50," Lynch said.
By raising rates a half point, the ECB could inadvertently be sending a signal that rates will be on hold for awhile, "and this is something they don't want to do," Lynch said.
Market sentiment remains extremely bearish on the euro, analysts said. Something more than a rate hike will be required to clear the air and end the euro's erosion, they said.
Outlook brighter for Japan
Analysts said some of the pessimism is easing surrounding the Japanese economy. "The market is getting a bit more excited about Japan," said Gilmore of Foreign Exchange Analytics. "There is talk of fund managers buying Japanese stocks again."
Japan's second-quarter gross domestic product, to be released soon, will show a rise of about 0.8 percent, he forecast. "That would represent back-to-back quarters of growth, a noteworthy achievement," Gilmore said.
Tokyo has been experiencing a heat wave, increasing demand for electricity, and there is some evidence that consumers are finally beginning to spend, he said.
While Japan's numbers are looking better, prices are still falling and growth remains anemic.
"The markets will look to the upcoming Japanese economic reports for fuel to extend the yen's recent gains," said analysts at Chase Securities. The picture is likely to remain mixed, however, which should dull the yen's advance, they said.
U.S. economy robust
Meanwhile, the U.S. economy is looking very healthy, with low inflation and solid growth. The August employment report, due Friday, is expected to show a small rise in non-farm payrolls, following a 108,000 decline in July, when Census workers were terminated. The unemployment rate for August is forecast to hold steady at 4.0 percent, while wages are expected to rise 0.2 percent to 0.4 percent.
Although the Federal Reserve left rates unchanged at its meeting last week, "we are not off the hook yet," said Carl B. Weinberg, chief economist at High Frequency Economics, Valhalla, N.Y.
"If data between now and the October or November meeting show either a re-acceleration of demand or a slowdown in productivity growth, we should be on the alert for a rate hike," Weinberg said.
The Federal Open Market Committee's statement last week warned that even though recent data have indicated a moderation of demand growth, and even though productivity gains are increasing potential growth, the gap between actual and potential growth is still widening, and the pool of available workers is small.
The FOMC said it believes the risks are "weighted mainly toward conditions they may generate heightened inflation pressures in the foreseeable future." 
-- Gordon Platt is a freelance columnist writing about currency markets for CNNfn.com
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