Dollar stomps euro, pound

The euro inspires artists, but not the currency markets

The prospect of a "soft landing" for the buoyant US economy continues to boost the dollar on the money markets.

On Wednesday morning, Europe's single currency was at a three-months low against the dollar, just half a cent above its historic low of $0.8845 in mid-May this year.

The market is increasingly concerned about [eurozone] growth prospects going forward

Bob Lynch, BNP Paribas

The pound sterling did not fare much better against the dollar, trading at $1.4766, its lowest point since 26 May.

Market analysts said the dollar's performance was a reflection of the different strength of the economies in the United States and Europe.

Profit-taking helped the euro to recover during the day, clawing its way back to a level of $0.90.

Sterling recovered to $1.4860.

German economy in doubt

The single currency is particularly in the firing line.

Inflationary pressure is likely to force the European Central Bank (ECB) to raise its interest rates shortly, up from the current level of 4.25%.

This would make the euro more attractive in the short-term, bringing interest rates more in line with levels in the US and the UK. However, higher rates could also choke off economic growth in the eurozone, which is only just recovering.

All countries in the single currency area are enjoying a sharp upturn and all forecasts predict that 2001 will also be a year of strong growth

Otmar Issing, ECB chief economist

Bob Lynch of BNP Paribas in New York said: "Things in the US still look pretty good [while in the eurozone] the market is increasingly concerned about the growth prospects going forward."

On Tuesday, a report from German economic research institute Ifo, suggested an unexpected drop of business confidence among the country's industry.

That news triggered the euro's latest slump, which was only partly reversed on Wednesday, when Germany's finance ministry released figures showing that economic growth actually accelerated during the second quarter of this year.

Crucially, economic growth was driven by both global demand, boosted by the weak euro, and an upturn in domestic demand.

The ministry now predicts an annual growth rate of about 3% to 3.5%.

German Finance Minister Hans Eichel insisted that "the fundamental data in the eurozone and the US show an improvement in favour of the eurozone, and sometime that has to have an effect on the euro".

Booming Ireland

While the eurozone's largest economies, Germany, France and Italy, are slow in picking up steam, the countries at the periphery are positively steaming ahead.

Ireland's finance ministry predicted on Wednesday an annual growth rate of a whopping 10.25%, in the sixth year of economic expansion.

The boom is coming at a price though. Inflation is expected to average 5.25% this year, up from original forecasts of 3%.

Many economists are not confident that the ECB's next rate rise will be enough to contain the inflationary pressure.

Some forecasts warn that inflation could peak at 7% or more - well above the eurozone target rate of 2%.

But Ireland is just a small part of the eurozone, and even though its economic data may push the ECB towards another rate rise, central bankers are likely to focus more on economic performance in economic giants like Germany.

'Best situation in 20 years'

The European Central Bank, meanwhile, says the eurozone is doing just fine.

Otmar Issing, the ECB's chief economist, told German business magazine Capital that the region's economic situation was "better than it has been in the past 20 years".

He said: "All countries in the single currency area are enjoying a sharp upturn and all forecasts predict that 2001 will also be a year of strong growth."

Mr Issing predicted that the chances of non-inflationary growth were good at a time of sharp increase in employment.

'Failed euro'

In the United Kingdom, one of the European Union's euro outsiders, shadow chancellor Michael Portillo said the euro's trouble was another point weakening the case for joining the single currency.

"The euro is no longer an experiment. It is in place and it is not working", Mr Portillo said.

He said the growing economic problems in Euroland showed that the "case for the euro is far from overwhelming".