Though there were some poor economic numbers out of the US, traders’ eyes were looking across the pond, where the European Central Bank cut interest rates a half-point to 2%.

Members of the ECB’s rate-setting Governing Council meet February 5, but the next “important rendezvous” won’t occur until the panel’s March 5 meeting, President Jean-Claude Trichet told reporters, adding that “we didn’t say that it was now the limit and we wouldn’t move any more.”

While Trichet offered his standard warning that policy makers never “pre-commit” to a rate decision, reading between the lines the remarks were a “clear rate signal,” says Aurelio Maccario, chief euro-zone economist at UniCredit MIB in Milan.

In Maccario’s view, Trichet was not only indicateing a February pause but effectively delivering a “pre-announcement of a March move.”

“The ECB is still behind the curve,” said Henrik Gullber, a currency strategist at Deutsche Bank (NYSE:DB) in London. It will “have to go below 1 percent.”

Meanwhile, at home, initial jobless claims rose by 54,000 for the week ended January 10, to 524,000, the Labor Department said. “The experience of previous deep recessions suggests claims are nowhere near their peak, and we doubt that peak will be reached before the fall of this year,” said Ian Shepherdson, of High Frequency Economics. He expects a peak of 750,000.

Source: Dollar Higher vs. Euro

Sterling also edged slightly higher, the day after it posted its largest one-day drop against the dollar since 1992, following the pound’s ejection from the European exchange-rate mechanism.

Strategists at UniCredit MIB in Milan believe that the dollar will remain well-supported against the euro and the pound ahead of Thursday’s policy meetings of the European Central Bank and the Bank of England. Both are expected to cut interest rates.

“While sterling has already incorporated a new BOE easing to 2% on Thursday, a mere 50 basis point cut by the ECB, as we expect, should drag the euro further lower,” the UniCredit strategists said.

The BoE last month aggressively slashed interest rates 1.5 percentage points to 3% — its lowest level in more than 50 years, while the ECB trimmed its key rate to 3.25% from 3.75% in November.

Source: Dollar Slips Against Euro

The government’s bailout of Citigroup (NYSE:C), with a plan that includes a $20 billion capital infusion, and guarantees for as much as $306 billion of Citi’s troubled assets, clearly didn’t sit well with buck boosters.

David Watt, senior currency strategist at RBC Capital Markets, was unconvinced, writing that, “[Yesterday’s] sell-off in [the] U.S. dollar and the equity bounce are welcome reprieves, but do nothing to undermine an overall bullish U.S. dollar stance.”

The euro’s charge against the greenback came, a bit surprisingly, after the closely-watched, Munich-based Ifo Institute’s November business-climate index showed a steeper-than-expected drop to a 15-year low of 85.8.

Economists took that as a clear signal that Europe’s largest economy is deteriorating. Also likely is that the euro zone’s hitherto resilient labor market will begin to suffer significantly in coming months.

“The upshot is that the recession is becoming increasingly entrenched, with more pain to consumers lying ahead,” said Tulia Bucco, an economist with UniCredit MIB in Milan.

Source: Dollar Slammed Against Euro

World stocks rebounded from a  5-1/2 year low on Friday and oil rose above $50 as expectations  of further interest rate cuts helped to cushion deepening gloom  about the broader economy.

Wall Street was set for a firmer start, one day after the  benchmark S&P 500 index fell to its lowest level since  1997 as troubles at Citigroup (C) and U.S. automakers  triggered fears about the wider economy.

However, hopes that the world’s central banks would cut  interest rates further — with talk that China might lower   borrowing costs later on Friday — helped world stocks off an  earlier 5-1/2 year low.

“The darkest hour is just before dawn,” said Justin Urquhart  Stewart, director at Seven Investment Management.

“The actions being taken are the key difference between the  1930s and now.”  MSCI world equity index was up 0.9 percent  after hitting its lowest level since April 2003.

The FTSEurofirst 300 index also rose 0.2 percent.  Emerging stocks gained 2.5 percent. U.S. stock futures  were up almost 3 percent.

U.S. crude oil gained 1.7 percent to $50.23 a barrel,  having hit a 3-1/2 year low below $49 earlier.

The December bund future fell 30 ticks, reversing  earlier gains. The two-year U.S. Treasury yield touched a fresh record low of 0.9586 percent before rising.

In Asia, the 10-year Treasury note dropped a full point in  price to yield 3.112 percent, after hitting 2.990  percent on Thursday — its lowest level since the 1950s. The  10-year yield was trading at above 4 percent only in June.

“The main risk is the recession and that we are probably  ahead of the worst year over the last century in terms of  economic growth and that this will take its toll on many  industries,” said Kornelius Purps, fixed income strategist at  UniCredit.

“We are probably only at the beginning of this poor  performance in terms of economic growth and other factors will  follow. This is quite worrisome and will keep a bid in the bond  market.”

The yen fell 1 percent to 94.62 per dollar after  hitting a three-week high beyond 94 earlier. The dollar fell 0.5 percent against a basket of major currencies.

LICENSE TO CUT?

Talk of Chinese interest rate cuts complemented a rumour  that authorities might soon announce the creation of a 300  billion yuan fund to support the stock market.

Euro zone interest rates are also expected to fall next  month, and possibly earlier. A purchasing managers index survey  showed on Friday that output of euro zone services and  manufacturing business sank much further and faster than  expected in November to record lows.

JP Morgan (JPM) also said that bigger-than-expected declines in  Canadian inflation also allow the central bank to cut interest  rates more aggressively in December by as much as half a  percentage point.

The Bank of Japan, however, kept its key policy rate  unchanged at 0.30 percent on Friday. Governor Masaaki Shirakawa  said more rate cuts could disrupt markets as they might cause  various problems in ensuring smooth fund supply in money  markets.

First-quarter GDP growth reached 0.7%, exceeding forecasts and keeping the annual rate flat at 2.2%. Chalk it up to Germany, which accounts for about a third of the eurozone. Its quarterly growth rate hit a 12-year high of 1.5% in the first three months of this year, shrugging off the strong euro, high oil prices and global financial turmoil. It was helped by a rise in investment and consumer spending, the latter marking a recovery from a sharp fall in the autumn.

Growth is heading down…

Nonetheless, this seems likely to prove a “high-water mark” for the euro area, said The Economist. Germany’s GDP figure was boosted by abnormally strong construction activity, due to mild weather. This fillip could easily knock 0.4% off growth next quarter as it unwinds, said Capital Economics.

More importantly, reliable surveys, including the purchasing managers’ index – the PMI gauging manufacturing activity hit a three-year low in April – point to much slower growth this quarter; eurozone industrial production growth has shrunk to 2%, with March’s fall in capital goods production a “sign that the strong euro and weakening global demand may be starting to take their toll”. Even German firms are now feeling the pinch from the strong euro – shipments fell in February and March, said The Economist.

Consumption is a further worry. The zone’s retail sales declined for a fourth time in six months in March and are 1.6% down on last year. Given worries about inflation and real income growth having slid over the past four years, it’s hard to be confident that German consumption is set for a significant boost, despite recent falls in unemployment and high consumer savings. That’s a pity, since shoppers in another heavyweight economy, Spain, are all spent out now that their housing bubble has collapsed. Quarterly growth is at a 13-year low. The debt deleveraging process in Spain and Ireland “has barely started”, said Julian Callow of Barclays Capital. Italy, meanwhile, appears in danger of slipping into recession.

…as the credit crunch tightens

And the credit squeeze is worsening. The latest ECB survey covering the first quarter shows that 49% of lenders tightened standards for corporate loans, up from 41% in the previous survey. This is significant, said Liam Halligan in The Sunday Telegraph, because 85% of eurozone finance is made up of bank credit, compared to under half in America. So the first quarter may have looked good, but the data is set to look a lot “less flattering”, as ECB president Jean-ClaudeTrichet put it, from now on.

Source: A High Water Mark for The Eurozone