Euro hits 15-year peak against yen after ECB raises rates

THE euro hit a 15-year peak against the yen and a fresh four-week high against the US dollar on Thursday (Jun 15) after the European Central Bank (ECB) raised interest rates and signalled further tightening to bring eurozone inflation to its medium-term target of 2 per cent.

The ECB lifted rates by 25 basis points, as expected, its eighth successive increase, to 3.5 per cent, the highest in 22 years.

Its staff have also increased forecasts for inflation excluding energy and food, especially for this year and next, owing to past upward surprises. The inflation projection for this year was raised to 5.1 per cent from 4.6 per cent.

“It’s a hawkish surprise as the inflation forecasts were revised higher by more than expected, for core in particular. That’s an indication of further tightening to come in the ECB’s outlook,” said Sebastian Vismara, global macroeconomist and strategist at BNY Mellon investment management in London.

“Euro is appreciating, and short rates have moved higher, so there’s a bit more hawkishness in the front end of the curve. The market is interpreting this as hawkish, not necessarily the hike itself, but what it’s communicating in terms of the outlook,” he added.

In mid-morning US trading, the euro was last up 0.5 per cent at US$1.0894, after earlier touching a four-week high of $1.0881.

Against the yen, the euro rose 0.8 per cent to 152.97, hitting 153.39 yen, the highest since September 2008, following the ECB decision.

The ECB move came a day after the Federal Reserve left interest rates unchanged. But the US central bank signalled further rate hikes to come this year.

The Fed’s policy decision snapped a string of 10 consecutive rate hikes. But the projections, or dot plot, showed that policymakers expect two more increases by the end of 2023. Fed chair Jerome Powell said rate cuts in 2023 would not be appropriate.

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“Fed delivered a hawkish skip,” said Mohit Kumar, chief financial economist for Europe at Jefferies.

“The revision to the dot plots was more hawkish than our expectations, as we had expected an upgrade to reflect one more possible hike,” he added.

The US dollar index, which measures the currency against a basket of other major currencies, was last down 0.2 per cent at 102.76.

The greenback briefly trimmed losses after data showed that US retail sales unexpectedly rose in May, increasing 0.3 per cent last month after rising 0.4 per cent in April.

Economists polled by Reuters had forecast sales slipping 0.1 per cent.