The euro nearly slipped below $1.38 on news that the European Central Bank was considering taking its deposit rate below zero. The common currency traded at $1.3810 at 3:25 GMT on Wednesday morning as investors nervously eyed next week's ECB policy meeting.
Finnish central banker Erkki Liikanen told the Wall Street Journal that the ECB was willing to consider lowering the deposit rate, which would make it negative. Liikanen said that a negative rate could protect against excessively low inflation and would encourage bank lending.
Such a move would likely prove controversial as the ECB would be the largest central bank to risk a rate below zero. A negative deposit rate would essentially charge banks for holding on to excess cash and many worry that the region's banks would pass that added cost on to customers by charging higher interest rates for loans.
However, if the deposit rate is lowered it could encourage lending, which in turn would take short-term borrowing costs down. The euro would likely lose some of its new found strength as well, something most fragile eurozone economies would benefit from.
Liikanen's comments indicated that central bankers are thinking about the euro's recent rise and will take the currency's strength into account when making April's policy decisions. Although the exchange rate is not a policy target for the bank, an extremely strong euro has the potential to take the bloc's inflation rate even lower.
Moving forward investors will have their eyes on the central bank for any clues about its upcoming policy decisions. In March, the bank surprised markets by maintaining its current policy and announcing that it didn't see the need for further easing based on the eurozone's rate of recovery.
BY Laura Brodbeck