Euro suffers from anxiety over higher interest rates

This week's half a percentage interest rate rise is back-firing on the still beleaguered euro.

After Thursday's much larger-than-expected rate increase, the euro immediately surged 1 cent on optimism that higher rates will narrow the gap between the higher rates of return in the US and Europe. But it quickly retreated on concern that higher borrowing costs may impede growth in the region's economies.

"The market is now having second thoughts in terms that maybe the ECB is being overly aggressive with its monetary tightening," said Mr Alex Beuzelin, an analyst at Ruesch International in Washington. "Although European economies are accelerating, they may not be able to withstand an aggressive approach to interest rates."

The euro fell as low as $0.9485 before closing at $0.9523 just below Thursday's close of $0.9544. According to Mr Jim Power, chief economist at Bank of Ireland, this negative reaction is consistent with previous rate increases where the euro has always been weaker a day later. However, it stayed above $0.9470 - a key level.

He added that a quarter point rise would have been more effective in boosting the euro. The markets now feel that the ECB will effectively be on holidays for three to four months.

But there was also a story of renewed dollar strength on the back of rising US stocks.

However, attention is likely to again focus on the rebounding European economy, boosting the euro. The euro zone economy grew 0.7 per cent in the first quarter from the fourth quarter, as the euro's decline and improving economies worldwide spurred exports.