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Tuesday, 14 August, 2001, 07:10 GMT 08:10 UK
Euro continues to strengthen
A rotating Euro symbol
The euro: gaining strength against the dollar
The euro's strength against the dollar, sterling and the yen persisted, spurred by monetary policy changes in Japan and continuing fears about the US economy.

In early trade on Tuesday, the euro rose to a 3.5-month high of about 110.50 yen, up from 109.76 yen late in New York.

The Bank of Japan loosened its monetary policy on Tuesday, effectively cutting interest rates and sending the yen lower on the foreign exchange markets.

Meanwhile, the euro firmed slightly against the US dollar to 89.72 cents, up from 89.62 cents in late Monday trade.

On Monday the euro at one point climbed to 90.06 cents, breaking through the 90 cent barrier for the first time since 26 April, although in later trade it fell back slightly.

There was some hope of respite for the UK's hard pressed exporters as the euro also gained ground against the pound to hit its highest level for five months. In early trade in London on Tuesday, a euro was worth more than 63.3p.

Inflation risk eases

Some short-term support for the euro is flowing from hopes that the European Central Bank will reduce interest rates for only the second time this year, perhaps as soon as 30 August, some economists said.

Retail sales figures in Germany, released on 13 August, were even worse than expected, encouraging hopes of a rate cut from the ECB at the end of August or at the following meeting on 13 September, said WestLB currency strategist Michael Klawitter.

"We expect that eurozone inflation will be favourable (for a rate cut)," he said. "This is something investors are betting on, and is supplying some mild support."

The latest monthly report from the ECB, released on 9 August, said "sizeable" risks remained to growth in the eurozone.

The ECB also said inflationary pressures in the 12-country eurozone may be easing.

Marc Hendriks, currency strategist at SocGen in London, agreed that the ECB will cut rates within a few weeks, with at least one further cut expected later in the year. In May, the bank cut a quarter-point, to 4.5%.

All eyes on the US

But the euro's surge is unlikely to last, he said.

Like Mr Klawitter, he stressed that the US is the real story, following on from the depressing outlook in the Beige Book which spoke of stagnating growth.

A mass of US economic data is due out this week, from retail sales numbers on Tuesday via industrial production and consumer prices to trade balance figures and the well-regarded University of Michigan consumer sentiment survey on Friday.

Results from key companies such as computer maker Hewlett-Packard are also due this week. These are likely to demonstrate that the pain felt by US corporations is set to persist, said Mr Klawitter.

Flood of data

The consumer numbers in particular are eagerly awaited. With manufacturing in the doldrums, consumer spending has helped support the US economy this year, and significant slippage could trigger further pressure on the dollar.

"The dollar was only as high as it was because there was nothing else to buy," he said, pointing to the continuing weakness of eurozone economies and of other possible candidates such as the Swiss franc.

"Now that's gone too, and there's nothing to buy at all."

The euro is likely to stay within a range of 85-92 cents for the rest of the year, Mr Hendriks said.

Whatever its current woes, the US economy is still a better bet than Europe for a recovery some time early next year, he said.

View market data
Launch marketwatch
The Markets: 9:29 UK
FTSE 100 5760.40 -151.7
Dow Jones 11380.99 -119.7
Nasdaq 2243.78 -28.9
FTSE delayed by 15 mins, Dow and Nasdaq by 20 mins
See also:

10 Aug 01 | Business
Dollar slides against euro
08 Aug 01 | Business
US economy slows further, says Fed
09 Aug 01 | Business
ECB sees 'sizeable' risks to growth
20 Jul 01 | Business
Talking up the dollar
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