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AFP

Business

Euro gets boost as Russian gas returns, ECB supersizes rate hike

ECB Euro Russia United States Europe European Central Bank Christine Lagarde Fawad Razaqzada Paris eurozone (Location)

Paris (AFP) - The euro briefly soared against the dollar on Thursday after Russia resumed gas supplies to Europe and the European Central Bank surprised markets with a 0.5-percentage-point rate hike.

Sitting at just under $1.02 before the ECB announced its first rate hike in over a decade, the euro shot up as high as $1.0279.

It later fell back as ECB chief Christine Lagarde spoke to journalists.

While ECB policymakers had flagged a hike in rates at the meeting on Thursday to tame soaring inflation, analysts were divided about whether the traditionally cautious institution would proceed with a quarter-point or half-point move.

City Index analyst Fawad Razaqzada said that the euro's recent slump -- it briefly fell under dollar parity last week -- meant that the eurozone is now importing more inflation, which favoured a bigger hike.

The jump in eurozone inflation to an annual rate of 8.6 percent in June also increased pressure on the ECB, as did the fact other central banks have moved more aggressively than markets had expected.

"The ECB had to surprise, otherwise the euro would have plunged -– and they couldn't risk that," said Razaqzada.

The ECB also introduced a new tool to counter spikes in the borrowing costs of some eurozone countries.

With the resignation of Prime Minister Mario Draghi increasing the political risk in Italy and sending Italian government bond yields climbing, the ECB may need to use its new tool.

The difference between Italian government bond yields and those of Germany, the eurozone benchmark, widened on Thursday.

Market analyst Michael Hewson said that ECB chief Lagarde failed to reassure the markets on how this new tool will be used.

"For any tool to be effective the market must believe it will work," said Hewson, adding that the rules would appear to exclude using it for Italy.

"The reaction of the euro in the aftermath of this is telling, as it gave up its post rate hike gains," he noted.

The political crisis sent Milan's FTSE MIB index down three percent.It later pared those losses to close down 0.7 percent.

Paris stocks managed a 0.3 percent gain, while Frankfurt's DAX slid 0.3 percent despite the resumption of Russian gas flows.

Russia on Thursday restored critical gas supplies to Europe through Germany via the Nord Stream pipeline after 10 days of maintenance.

European officials had worried that Russia would find a pretext to keep the gas shut off.

Uncertainty still lingers over whether the Kremlin might trigger an energy crisis on the continent this winter.

The ECB's Lagarde acknowledged that the fallout from Russia's war in Ukraine and soaring inflation have darkened the eurozone's economic outlook.

On the commodities markets, oil prices extended their losses -- with WTI below $100 -- after data showed US stockpiles rose more than expected last week as Americans opted not to pay for expensive petrol.

The figures come despite being at the height of the high-demand summer driving season.

Wall Street stocks were mixed in late morning trading.