Euro Slips After Federal Reserve Rate Decision

The euro has begun to slide against the US dollar, after the Federal Reserve announced their expected interest rate rise of 0.25%, the first rate increase since 2006.

Since the decision was made around 8PM GMT yesterday evening, the euro has faltered from buying just over $1.09 to $1.086 this morning, this was after it reached a nadir of below $1.085.

Just before the announcement was made, the euro spiked up to just under $1.1.

Its is expected that the euro would suffer badly at the rate rise, but so far the gains form the dollar have been steady rather than spectacular, but of course this is very early days.

Some analysts believe that this is due to the lack of any element of surprise from the decision of the Federal Reserve, the news has not hit the euro too hard just yet.

In their analysis for 2016, BNY Mellon expect that the euro could eke out a greater share in exports due to a weaker currency. They also said that expansive monetary policy cannot be maintained without encouraging asset price instability.

BNY Mellon also  believe that monetary policies have approached their limit globally. And the European Central Bank president Mario Draghi may have come to a similar conclusion.

Effect of the Federal Reserve Decision

The announcement of the rate rise by 0.25% is enough to send ripples around the world.

And could put pressure on other countries to re-evaluate their interest rate, and monetary polices.

Across the euro area, the recent decision to extend the EUR 60 billion per month  asset purchasing Quantitative Easing programme, is in contrast to the tightening of borrowing condition now being favoured across the Atlantic.

Developing countries are also experiencing slow growth, and a rate rise now results is their borrowing costs now being higher.

It is feared that the changed conditions and the increase in borrowing costs, will further exacerbate the slowdown in growth.

In a statement made after the rise was announced, the Federal Reserve said that interest rates would remain at historically low levels, and that any further increases would be made on a gradual basis.

The rate decision also raises the rate of the Federal Funds, the rate of rates that banks offer when they are lending to each other, from 0.25% to 0.5%.

Pound Falls to Us Dollar Following Rate Increase

In a similar fashion to the euro, the pound has also fallen to the US dollar after the rate rise announcement was made.

From yesterday evening, when the pound bought $1.5, sterling declined against the greenback gradually throughout the night, and now is buying $1.43.

The rate rise in the United States could pose problems for the UK, who often have followed the decisions on interest rates that are made from the Federal Reserve.

The Bank of England’s Monetary Policy Committee, recently voted overwhelmingly in favour of keeping interest rates at the current level of 0.5%.

Financial analysts are now encouraging the UK to again follow in the path of the United States, and raise interest rates next year.