Dollar’s weakness may force ECB to cut interest rates, economist warns

THE continuing slide in the dollar may force the European Central Bank to signal plans for an interest rate cut, IIB Bank economist Austin Hughes warned yesterday.

Mr Hughes said the ECB may take action to stem the dollar’s collapse against the euro by guiding markets away from the expected rise in interest rates in the coming months. Signalling a potential cut would cool down the euro’s appreciation by forcing currency traders to factor in the risk of lower ECB rates when assessing the future direction of the euro/dollar exchange rate.

Mr Hughes said the currency markets were getting ready to test how low the dollar could go against the euro and that the exchange rate could hit $1.32 or even $1.35 in the weeks ahead. A sudden move beyond $1.35 would make an ECB rate cut “a real possibility” in early 2005, he said, although there remained a number of reasons why the dollar’s decline would fall short of outright collapse.