The European Central Bank weighs an interest rate hike at its regular monthly meeting Thursday amid renewed threats of intervention on behalf of the euro from some of the world's top bankers.
The mood will be brightened by growing optimism that the tenuous recovery of Europe's beleagured currency is taking hold after the euro, shared by 11 European nations, bottomed out last week at an all-time low under 83 cents.
"I would rule out an interest rate hike because it's too soon since the last one," said Stefan Schneider, chief euro economist with Deutsche Bank. The Frankfurt-based bank had surprised markets a month ago with a rate hike to 4.75 percent.
"But an intervention might be a slightly different issue because when central banks intervene it's often to reinforce an upward trend in the exchange rate," Schneider said, adding that the euro's turnaround is too weak to warrant such an action now.
On Wednesday, the euro climbed above 85 cents, a marked improvement over last week but still way below its January high of dlrs 1.04.
The specter of intervention was raised this week by Ernst Welteke, president of Germany's central bank, who said in a magazine interview that the euro's guardians were prepared to intervene again when necessary to boost the euro.
U.S. Treasury Secretary Lawrence Summers spurred further speculation when he said Tuesday there was "a role for intervention."
In September, when the euro first tumbled through the 85 cent level, the ECB and other allies, including the U.S. Federal Reserve and the Bank of Japan, launched a synchronized strike to buy euros.
Economists and money traders speculated another intervention was in the works last week when the euro plunged below 83 cents. But recent data showing weak U.S. economic growth bumped the euro up immediately.
And the euro got a one-cent boost Wednesday when data showed U.S. manufacturing activity slowing for the third straight month.
"It seems that markets are now seeing a greater risk of deterioration in the economic environment in the United States and finally realizing that sooner or later its economy has to slow down," said Bernhard Pfaff, head euro economist at Commerzbank.
Despite renewed confidence in investing in Europe, Pfaff said it was still too early claim a euro revival. He said if the ECB intervenes again, it makes better sense to do it later this month after seeing whether the appreciation is a real trend.
Intervening then would also open the door for the U.S. Federal Reserve to join the intervention, something seen as critical to lending needed credibility and scale for such a move. The ECB's trans-Atlantic counterpart is seen as a reluctant partner now for fear of upsetting markets before the upcoming U.S. presidential election.
In the meantime, the threat of intervention is one factor helping the euro.
When the ECB shows itself willing to intervene in currency markets and buy euros, money traders are less willing to sell euros for fear of being caught empty-handed if a big buyer for the currency suddenly emerges.
(AP)