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Much More Needed to Take Shine Off the Euro

Wednesday, 15 May 2013 | 11:04 PM ET
David Gould | Photographer's Choice RF | Getty Images

The euro's fall to six-week lows is likely to be welcomed by the European Central Bank (ECB), which has been trying to talk down the currency. Yet to really take the shine off the euro, policymakers need to show they are serious about pushing rates into negative territory, strategists said.

The euro fell to $1.2842 on Wednesday, its lowest level since April 4, after data showed the euro zone economy contracted for the sixth straight quarter at the start of the year, marking its longest recession on records that date back to 1995.

Still, the euro had clawed back about a third of a percent to $1.2878 by early Asian trade on Thursday and strategists say the single currency continues to be supported by strong inflows of foreign cash into peripheral euro zone government bond markets.

(Read More: Germany in 'Stagnation,' Top Merkel Advisor Warns)

"The euro is definitely getting undermined by the weaker euro zone economic data, but to really push the euro lower we need to see the ECB take more measures - cut interest rates more or adopt negative interest rates and they've been slow to do that," said Mansoor Mohi-uddin, chief currency strategist at UBS Investment Bank in Singapore.

The ECB cut its key interest rate by 25 basis points to 0.5 percent at the start of the month and since then officials have started to talk about negative interest rates – a move that is seen as partly designed to knock down the value of the euro and give the euro zone exporters a much-needed lift.

(Read More: Watch Out Euro Bulls, Draghi Is Watching You)

Despite a recent pull-back the euro remains relatively resilient. It is down about 2.4 percent against the dollar so far this year. Take a look at European peers, the Swiss franc and Sterling – the Swiss franc has fallen almost 5.5 percent and the British currency is down about 5 percent.

"It's hard for Europe to be competitive with the euro at current levels," Kumar Palghat, director of Kapstream, told CNBC's "Cash Flow." "The euro has to go down just like everything else has."

The ECB policymaker Ignazio Visco was quoted on Monday as saying that cutting deposit rates below zero would be an effective way to support the recession–hit euro zone economy.

Analysts say the latest poor set of gross domestic product (GDP) numbers from the region could encourage the central bank to step-up its talk of negative rates or spur it to take more aggressive action to prop up the economy.

"In the coming days, we expect ECB policymakers to remind the market that negative deposit rates or purchases of asset-backed securities are on the table and when they do, euro/dollar could extend its losses," Kathy Lien, managing director at BK Asset Management wrote in a note.

(Read More: Short Story: Sterling Expected to Fall Further)

Desmond Chua, a market analyst at CMC Markets, said he expected to see the euro slide if policymakers start to drop hints about further stimulus measures.

Can't Bring It Down

According to Sebastian Galy, a senior currency strategist at Societe Generale in New York, further easing by the ECB may not lead to a weaker euro.

"The euro is starting to crack, but that has more to do with the dollar, which is rising across the board," he told CNBC Asia's "Squawk Box."

"The ECB can do very little in terms of the value of the euro. The more aggressive it is, the more interesting it is for investors to go back into euro land," he added.

- By CNBC.Com's Dhara Ranasinghe, Follow her on Twitter: @DharaCNBC

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