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ECB Intervenes To Reduce U.S. Economic Pressure
by Dina Reda
WASHINGTON (IslamOnline) - The European Central Bank (ECB) intervened the currency market earlier in the week in an attempt to boost the euro, Europe’s unified currency.
The ECB, responsible for monetary policy in 11 European single-currency nations, bought euros on the open market in a unilateral action to defend the currency without any help from the world’s leading central banks.
The single currency, propped up by the action, reportedly rose to 87.27 U.S. cents early Monday in London, from 86.68 cents in late New York trading Friday.
A Group of Seven (G-7) statement expressing the weakness of euro and its negative effects on global economy followed the intervention. As long as the strength of the U.S. economy pressures the euro, regular interval interventions are expectedly to appear.
Strong economic expansion and higher interest rates in the U.S made the fast-growing American economy a better place for investors to stick their money, rather than in unstable European markets.
When interest rates in the U.S. were 6.5% compared with 4.75% in the 11-country euro-area, this mainly attracted investors to the U.S. by offering 1.75% more on deposits premium over those held in euros.
European purchasers buying American firms, who already possessed dollar deposits, have no need to sell euros to buy dollars. It also may be able to borrow in dollars, without selling euros.
“There has been a peak in terms of portfolio investment,” Avinash Persaud of State Street, a Boston Bank said, “Europeans investors have lost some of their appetite for America,” he added.
Recent reports indicate that the American economy maybe slowing. It was during this down time that the ECB intervention tried to take advantage of dollar deterioration and narrow the gap between U.S and euro-zone economies.
Klaus Friedrich, chief economist at Dresdner Bank in Frankfurt, said that because of the falling euro European stock markets have performed better than America’s this year, leading euro-area investors turning to place their money in America.
Portfolio managers can hardly manage fluctuations of such weak currency along its progressive drops, resulting in the currency’s fundamental value lacking a solid method for calculation.
The euro has lost about 30% of its value against the dollar since it was born in January 1999.
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