European Central Bank Resists Pressure, Holds Interest Rates Firm

Europe’s common currency fell sharply Wednesday but later rebounded after the European Central Bank defied expectations and held interest rates steady.

The euro initially tumbled to one-week lows, extending declines made a day earlier, after the ECB announced that it kept euro zone rates unchanged at 4.75%. The ECB is the only major central bank that has not cut rates in response to the looming global economic slowdown, and most analysts had expected a modest quarter-point cut.

But within hours, the euro had erased most of its losses as a short-covering of positions ahead of the Easter holiday weekend spurred a run-up.

In late U.S. trading, the euro changed hands around 88.85 cents against the dollar, about 0.75 cent above lows hit earlier in the session and virtually unchanged from the previous U.S. close.

Against Japan’s currency, the euro bought about 110.70 yen--an increase of more than a yen from the session’s low and a rise of around 0.25% from the prior U.S. close.

The euro’s upward push against the yen also allowed the dollar to regain lost ground against the yen. It bought about 124.70 yen, up 0.30%.

In standing pat, ECB President Wim Duisenberg made clear that he would not be swayed by public or financial market clamor for a cut, analysts said. His stand reinforced the view that the ECB was in no hurry to reduce interest rates, they said.

Currency traders believe that the ECB is behind the curve in easing monetary policy. But inflation in the 12-member euro zone remains above its targeted ceiling of 2%. As a result, analysts said, the ECB is more reluctant to ease monetary policy than the U.S. Federal Reserve, which has cut interest rates by 150 basis points this year to help lift the sharply decelerating U.S. economy.

“You have to look at what the ECB is trying to accomplish,” said Dennis Heidt, chief dealer at BNP Paribas in New York. “They are trying to fight inflation, and that is their primary concern.”

The ECB’s lack of concern about the external value of the euro means that the euro is at risk of further declines in the days ahead, he said.

The dollar rise against the yen reversed declines seen in Asia amid continued wariness that Japan was prepared to take action to halt its currency’s downward spiral.

But traders said the specter of intervention in the Japanese currency market continued to make traders cautious about aggressively selling the yen lower.

“The big picture is that the yen should weaken, but the pace is something [the Japanese government is] watching pretty closely,” said Bernard Tsui, vice president at Union Bank of California. “They want to somehow control it.”