Euro slides as Fed chief steals ECB's rate hike thunder

The euro on Wednesday touched a fresh 20-year dollar low. PHOTO: REUTERS

NEW YORK - The euro slid on Thursday against the US dollar despite a record interest rate hike by the European Central Bank (ECB) as Federal Reserve chief Jerome Powell also signalled a tough approach against inflation.

Meanwhile, the pound remained close to a 37-year low against the dollar that was struck on Wednesday, as new British Prime Minister Liz Truss announced that she will freeze domestic fuel bills for two years to help ease the burden of a cost-of-living crisis.

The British currency did not move significantly on news of the death of Queen Elizabeth II after a 70-year reign.

The euro, which had broken back above parity with the dollar, slid down as far as US$0.9934 before recovering some ground to trade at US$1.0007 at 7.37am Singapore time on Friday. The pound was up 0.1 per cent at US$1.1518 after briefly dipping below US$1.15 on the death of the British monarch.

The ECB warned on Thursday that inflation was "far too high" and likely to stay above target for "an extended period" as it announced its record 0.75 percentage point hike.

ECB chief Christine Lagarde made clear interest rates were far from where they need to be to bring inflation down.

"We actually took the decision today that we would continue to raise interest rates... because we believe that we are far away from the rate at which we hope we'll see inflation return to the 2 per cent medium-term target," she said.

Ms Lagarde also warned that the euro zone risks recession if Russia completely cuts off gas, which it has nearly done.

But comments by Mr Powell were seen as even more hawkish than those by Ms Lagarde.

"We need to act now forthrightly, strongly as we have been doing and we need to keep at it until the job is done to avoid... the kind of very high social costs" of the surge in inflation in the 1970s and 1980s, he told a US think-tank.

Mr Chris Beauchamp, chief market analyst at online trading platform IG, said: "Investors clearly believe that the Fed is more committed to higher rates than the ECB, while the stronger economic performance of the US means the greenback and not the euro seems the more attractive prospect."

The Fed has made it clear it plans to continue to aggressively raise interest rates to rein in surging inflation, even at the cost of causing some economic pain.

The dollar has moved ever higher against its major peers in recent weeks as investors flood into the currency hoping for better returns as the Fed raises rates and as they seek a haven in the face of economic turmoil.

The euro on Wednesday touched a fresh 20-year dollar low.

The Fed holds its next policy meeting on Sept 21, with a third successive 75-basis-point lift forecast.

In equities trading, euro zone stocks closed the day mostly higher, and Wall Street equities pushed higher following a choppy session.

Analysts said the hawkish central bank policy was largely in line with expectations.

"The resilience was construed as a sign that a lot of bad news, and worries about near-term rate hikes, have been priced in already," said Briefing.com. AFP

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