EUR/USD fell from 1.2160 to 1.21 on Wednesday on reports that the European Central Bank (ECB) might cut the already negative deposit rate further.
However, according to Robin Brooks, Chief Economist at the Institute of International Finance (IIF), the deposit rate cut is ineffective in countering the currency strength. The exchange rate is more sensitive to changes in the longer duration bond yields. The deposit rate cut mostly affects short-term bond yields.
“ECB focus on a deposit cut to counter Euro strength is misguided. G10 central banks have targeted longer-end yields more & more. It’s the same with FX, where the driver of Euro is between 5- and 10-year rate differentials. What happens at the very front end (depo) doesn’t matter,” Brooks tweeted on Wednesday.
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