Swedish cut signals another dark day for the euro

The Swedish central bank has slashed its benchmark interest rate by 50 basis points to a record low 1.50%, and didn't rule out the possibility of further reductions down the road.

The aggressive moved is seen by many market watchers as playing a trailblazer for the European Central Bank as the euro-zone economy continues to stumble.

As markets digested the prospect of more public pressure on the ECB, the euro dropped to $1.2070 after the announcement from $1.2150 before the news.

The Riksbank, amid intense public pressure to stimulate jobs growth, also dropped its forecast for 2005 economic growth to 1.9% from its previous forecast for 3.2% growth. The sharp revision came after first quarter gross domestic product came in unexpectedly weak at a 1.4% annual growth rate, a result that stripped away the Riksbank's principal argument against monetary stimulus.

A sizable interest rate cut like this is an important hint for the ECB, as all across Europe economies are facing the same structural problem of a high labour cost.

European credit markets were quick to price in a possible ECB rate cut by the end of the year, sending prices for German government bonds soaring.

Further euro woes came from Welfare Minister Roberto Maroni, as he suggested that Italy should hold a referendum to decide whether to bring back the lira. Maroni is a member of the Northern League, a right-wing party that made its political mark in the 1990s calling for Italy's northern regions to split from the poorer south, and although the probability of the return to the Italian domestic currency is very unlikely, the comments further damage the reputation of the single currency.

Data for the day again looks sparse, with the only release of note in the form of the Bank Of England minutes due at 9:30am. The specific arguments Andrew Large used to justify a rate hike seem intact, as households continue to accumulate debt and inflation remains around target, therefore another 8-1 hold is likely. The real interest however, will be whether any MPC members viewed the current softness in consumer indicators as a reason to consider cutting interest rates. This seems unlikely after Governor King’s slightly hawkish speech last week, but with indicators beginning to point south, a more dovish tone should be evident.

Also of note - Federal Reserve Chairman Alan Greenspan and U.S. Treasury Secretary John Snow will testify at 10 a.m. on Thursday before the Senate Finance Committee on China, and as China released statements overnight pointing to a possible delay in re-valuation – ‘It is impossible for any changes (to the foreign exchange mechanism) to be carried out under heavy outside pressure or when speculators are looking for an opportunity.’ – look out for an interesting testimony!