Intervention threat bolsters euro

The exchange rates of Europe's two major currencies, the euro and sterling, have recovered from six month lows.

The euro moved back above the $0.86 barrier on London's foreign exchange market, after comments from a member of the European Central Bank were seen as increasing the threat of intervention to support the currency.

Given the level of the euro, the ECB could intervene at any time

Yasuji Yamanaka, Nikko Trust and Banking

And sterling surged by more than one cent as traders, correctly, foresaw that economic growth figures for the first three months of the year would be revised upwards.

Both currencies have in recent days hit their lowest levels since November, following the release of disappointing data.

Intervention threat

The euro weakened below $0.86 on Wednesday ahead of economic figures showing that the French and German economies, the most watched in the eurozone, were growing slower than had been predicted.

German inflation rose to 3.5%, the highest levels since 1993, official statistics revealed.

The euro's slide left it near levels reached last autumn, when central bankers around the globe snapped up the currency on foreign exchange markets in a drive to support its value.

Dealers have speculated that further intervention may begin on Monday when, thanks to public holidays in the US and Europe, volumes in the foreign exchange market are likely to be low.

This would make it easier for the European Central Bank to raise the euro's value.

"Given the level of the euro, the ECB could intervene at any time," said Yasuji Yamanaka, deputy general manager at Nikko Trust and Banking.

Advantage of surprise

But Mr Yamanaka pointed to the ECB's policy during the last euro support drive of maximising the effects of its intervention by taking traders by surprise.

Ernst Welteke: "Euro's weakness behind inflation rise"

"Intervention will not have an impact unless it surprises the market. So now may not be the opportune time," he said.

Comments from ECB member Ernst Welteke, decrying the level of the European single currency, heightened expectations of imminent intervention.

"The euro's weakness is one of the reasons behind the recent rise in inflation," said Mr Welteke, also chairman of the Bundesbank, the German central bank.

Key speech

European currencies also took heart from a speech on Thursday by Alan Greenspan, chairman of US central bank the Federal Reserve, in which he signalled that America still faces the threat of recession.

"The period of sub-par economic growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated," Mr Greenspan said, opening the door to further cuts in interest rates.

Sentiment over the yen, meanwhile, which has risen 4% against the dollar this week, was soured by data showing retail sales down 1.2% in April from the same month last year.

Pound recovers

Sterling fell 0.5% on Thursday after data from the Confederation of British Industry indicated that export orders were at a nine-month low.

But traders took heart from a decision on Friday by official statisticians to raise their estimate of UK economic growth between January and March by 0.1% to 0.4%, compared with the quarter before.

At 2000 GMT, the euro stood at $0.8595, and sterling at $1.422.