Euro continues to climb

Currency traders: marking the euro up once more

The euro continued its record-breaking ascent on Friday, climbing above $0.92 for the first time in four months, as investors sought refuge from volatile US equity markets.

The currency, which was trading at $0.9262 by midmorning, has now gained 11% since reaching a record low of $0.8230 in late October.

German Chancellor Gerhard Schroeder has welcomed the currency's new-found stability, taking it as proof that Europe and Germany's economic policies have worked.

"The fundamental data are very good. That they are also making themselves evident in the stability of the currency is a further proof of the correctness of the road we have taken," he said.

US switch

Analysts however say the latest rise was prompted by heavy selling of US equities, which has left currency markets awash with dollars, and investors looking for a safe haven.

There is also the uncertainty of whether the new US administration will back the dollar as strongly as the outgoing Clinton administration.

President-elect Bush named industrialist Paul O'Neill as his treasury secretary on Wednesday, a choice that analysts said would not reassure markets to the same extent as a Wall Street name.

"The euro's bounce was triggered by events in the US, and everyone is realising that it was the dollar that had been holding back the euro," Sonia Hellemann, foreign exchange strategist at Dresdner Kleinwort Benson, said.

Economic slowdown

Concerns about the slowdown in the US economy sent the tech-heavy Nasdaq composite 7% lower on Wednesday to its lowest level since March last year.

Investors are reported to be disappointed that the US Federal Reserve failed to cut interest rates on Tuesday.

"If the Fed had cut rates, there would be better prospects for US growth, and people would start buying stocks again," Jane Foley, economist at Barclays Capital's London office said.

But while many analysts are predicting that Europe's single currency will soon reach parity against the dollar, Ms Foley pointed to the fundamentals of the US and eurozone economies.

"The market is pricing in a deteriorating outlook for the US economy, but Europe is also deteriorating," she said. "This will have to be priced in."

Francesca Fornasari, foreign exchange economist at Lehman Brothers, said: "The fact the euro area is a relatively closed economy means the euro has benefited from safe-haven flows amid concerns of a hard landing in the US."

Interest rates

The euro also posted strong gains against sterling, which was hit by renewed speculation of an interest rate cut.

The single currency earlier rallied to a five-month peak of about £0.625 against sterling. It had previously reached a five-month high of £0.6209 on 7 December.

Sterling's weakness has been exacerbated by the release of the minutes of the Bank of England's Monetary Policy Committee on Wednesday showing growing pressure for a cut in UK interest rates.

Jeremy Hawkins, chief economic adviser at the Bank of America, said: "The market oversold the pound yesterday on the back of the Bank of England minutes.

"But with the euro looking stronger in general, euro/sterling will move up regardless."

A weaker pound will be welcome news to Britain's manufacturing sector, which has been loudly complaining about the difficulty the high pound has been causing for exports.