The dollar slumps to a one-month low against the euro after ECB chief says the central bank will likely start raising rates in the coming months - BUSINESS INSIDER
The US dollar fell Monday against the euro after ECB President Christine Lagarde wrote about a potential rate hike this year.
The ECB may exit its policy of negative interest rates by the end of Q3.
With inflation burning hot, Lagarde says the time is appropriate to start normalizing monetary policy.
The US dollar slumped against the euro Monday on the prospect of a rate hike in the eurozone, with European Central Bank President Christine Lagarde discussing the potential move as the region contends with record-high inflation.
The euro exchange rate in dollars hit an intraday high of $1.0692, up more than 1% and its strongest level since April 26. Earlier this month, the two currencies were nearing parity for the first time in 20 years.
"Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter," Lagarde wrote in a blog post on the ECB's website.
The ECB's deposit rate stood at -0.5%. Under negative interest rates, banks are charged a fee to hold their reserves at central banks. The action is aimed at spurring economic growth by pushing banks to lend and consumers to spend with money borrowed at ultra-low rates. The ECB launched negative interest rates in June 2014 to bolster the flagging eurozone economy and reduce the risks of the bloc spiraling into deflation.
The dollar's drop against the euro weighed on the broader US Dollar Index, which fell 1% to 102.13 on Monday. The index recently hit a 20-year high, fueled by the Federal Reserve's hawkish view on interest rates.
The region's inflation outlook has "shifted notably upwards" compared with the period before the COVID-19 outbreak, making it appropriate for the central bank to begin normalizing monetary policy, Lagarde said.
Eurostat has said inflation in the euro area was set to hit 7.5% in April, the strongest rate on record, driven largely by a 38% surge in energy costs.
"I expect net purchases under the [asset purchase program] to end very early in the third quarter. This would allow us a rate lift-off at our meeting in July, in line with our forward guidance," Lagarde wrote.