Euro Falls as Higher Rates Can Cripple Weaker Economies

The euro slipped today on the speculation that the interest rates hike, performed by the European Central Bank last week, may hurt the most indebted nations of the European Union.

The ECB raise its main interest rate on April 7, causing the uncertainty about the future of the European economy. Generally, the higher interest rates are considered good for an economy, but only if economic growth is strong enough. The problem with the EU is that the Union consists of many vastly different economies. And while economic growth of stronger economies, like in Germany, warrant higher rates, the problems of weaker ones, like Ireland and Portugal, will only increase with additional burden. ECB President
Jean-Claude Trichet attempted alleviate fears, saying that most interest rates remained fairly low and the monetary policy is still rather accommodative, but it wasn’t enough to make market participants believe in strength of the European economy.

Brian Taylor, a chief currency trader of Manufacturers & Traders Trust Co., explained:

Raising interest rates is always going to be bad for the periphery, and it’s hard to run the ECB because you have all these countries not moving in step. You have to look out for No. 1, and at this point that is Germany. The European Central Bank is going to move with probably multiple interest-rate hikes before the US, so the euro is supported by buyers on dips.

EUR/USD fell from 1.4470 to 1.4424 today as of 23:45 GMT. EUR/JPY went down from 122.80 to 121.70 after reaching the intraday high 123.32.

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