Euro Slow-Coach Takes a Pounding in Zero-Bound Race

Of five central banks voting on interest rates this week, only the European Central Bank in Frankfurt failed to reduce its cost of money to record lows, holding rates steady at 2.0%.

The market's reaction? Forex traders trashed the Euro vs. those currencies now paying way less than inflation.

Early in Prague on Thursday, the Czech central bank slashed its interest rates by half of one per cent, matching an all-time low at 1.75% and sparking a bounce in the Czech Koruna vs. the Euro.

Midday here in London, the Bank of England Thursday took its base rate further into record-low territory at 1.0%. Currency traders then pushed the Pound Sterling to a two-week high above $1.4650.

Tuesday saw the Reserve Bank of Australia cut its interest rate to a 45-year low. The Aussie Dollar bounced from near-6 year lows in response.

Wednesday the central bank of Norway cut its target interest rate by 50 basis points to 2.50%. The Norwegian Krone turned higher after losing one-third of its value vs. the Dollar since July last year.

So who wants to buy an interest-rate premium? The Euro spiked down on the ECB's decision to keep its rates flat, losing 2¢ from this week's high to trade below $1.2850 – a level first broken (on the way up) in Jan. 2004.

And valued in Euros, the price of gold – which yields nothing already, but also carries no counter-party or inflation risk – rose to a 3-session high of €720 an ounce, more than 14% higher for 2009 to date.

In short, Thursday's foreign exchange action confirms the currency markets' perverse verdict on falling premiums. First seen last year as the US Fed and Bank of Japan cut their rates to zero and their currencies leapt, this deflation-bent view of lower interest rates says that rewarding savers – rather than debtors – is beneficial to a currency's future. Whereas failing to cut is a negative.

Expect the Euro to suffer right up until the ECB next meets in March... or until currency traders start taking ECB chief Jean-Claude Trichet at his word and begin pricing in record-low Eurozone rates ahead.

Disclosure: None