The Federal Reserve’s first interest-rate rise in nine years sent the dollar slightly higher, but has done little to aid the European Central Bank’s apparent bid to weaken the euro materially.

The dollar rose 0.5% against the euro Thursday, building on a small gain after the Fed announced Wednesday that it will increase rates from near zero to between 0.25% and 0.5%. That does little to reverse a sharp fall over the past two weeks that at one point saw the buck drop around 5% against the common currency. One euro bought $1.0834 in afternoon trade Thursday.

Investors will now spend Thursday weighing up what the Fed’s move means for the euro.

The ECB says it doesn’t target the exchange rate. But investors say pushing down the euro has long been one of the ECB’s key levers for raising the region’s low inflation.

“A soft euro is part of the plan,” said  Alan Wilde, head of fixed income and currency at Baring Asset Management.

The currency moves have complicated efforts to revive the European economy, where annual inflation in November was 0.2%, well below the ECB’s target of close to 2%.

The ECB has reduced its own benchmark lending rate to 0.05% and launched a €60 billion monthly bond-buying program, in moves that analysts say were partly aimed at weakening the common currency.

Lower interest rates tend to reduce the attractiveness of a currency, as it encourages money to move into other countries or currency zones in search of higher yields.

For its part, the ECB had already disappointed euro bears earlier this month. The euro had fallen to just above $1.05 earlier in early December on bets that the Fed and the ECB would soon be shifting rates in opposite directions.

The ECB delivered a rate cut and stimulus package at its Dec. 3 policy meeting, but fell short of expectations of more-aggressive easing measures. The common currency subsequently rebounded to around $1.10.

“I think it’s done for now. Unless the ECB resumes talking about further cuts in deposit rates, the euro will trade in a $1.05 to $1.10 range,” said Axel Botte, a fixed-income strategist at Natixis Asset Management.

The euro started to fall following the widely anticipated Fed rate rise, with the central bank emphasizing a gradual path of increases. A statement from the Federal Open Market Committee lowered estimates for future interest-rate increases, though not as much as some had predicted.

The Fed’s promise of slow rate rises “raises the question of further policy measures from the ECB to combat the stronger currency,” said Charles Diebel, head of rates at Aviva Investors.

“Ideally for supporting the eurozone, they’d probably like the currency around parity,” he said.

ECB President Mario Draghi said earlier this week that the bank stands ready to use additional stimulus measures to bring inflation back to target if needs be.

Central banks seek to avoid deflation, a sustained and self-reinforcing fall in prices that could stifle consumer spending and growth, making it more difficult for governments and businesses to repay debts.

The ECB lowered the interest rate it pays on commercial bank deposits by 0.1 percentage point to minus 0.3% earlier this month, and also extended its €60 monthly bond-buying program by six months until March 2017.

Any upward pressure on the currency is likely to be met by promises of further easing from ECB officials, said Mr. Wilde.

Source: The Wall Street Journal