Bundesbank boosts euro

Heading south: can the ECB reverse the trend?

The euro seesawed on foreign currency markets as hawkish remarks by the head of the German central bank boosted the currency.

The euro, which has been trading near its historic lows, initially fell further in Asian trading to $0.8987, before recovering to $0.9040 in European markets.

Earlier in the week, worries about the strength of the German economy had pushed Europe's single currency to a three-month low of just under $0.89.

Bundesbank President Ernst Welteke said in a speech in Duesseldorf that the weak euro and strong European growth were fuelling eurozone price pressures and some countries were even displaying signs of overheating.

His remarks were widely interpreted to suggest that the European Central Bank would raise interest rates at its next meeting on Thursday.

Rate rise on the cards

Mr.Welteke said it was essential to counter price risks "as soon as possible" to ensure that the euro zone's recovery could continue unhindered by inflationary expectations. and that he was "far from pleased" by the fall in the euro.

"This increases sharply the possibility of a rate hike as early as August 31," said Lorenzo Codogno, a senior economist at the Bank of America.

Mr Welteke's remarks overshadowed the relatively good inflation figures for Germany in August.

While consumer inflation slowed to 1.8% in August compared to 1.9% in July, Mr Welteke drew attention to the sharp rise in the prices of imports caused by the weak euro.

Import prices rose 0.4% compared to the previous month, and 10.9% year-on-year, as surges in oil prices added to the euro's problems.

Investors sceptical

Nevertheless, analysts are divided on whether a rise in interest rates can stem the euro's fall.

Satoshi Tate of Sanwa Bank said: "Investors around the world think of their euro-denominated assets as over-weighted and yen assets as underweighted in their portfolios."

He predicted the single currency could drop to a historic low of $0.87 during the coming weeks, even after the much-anticipated interest rate rise.

Yoshihiko Kobayashi at Hypo Vereinsbank in Tokyo doubted whether a rate rise would support the euro, following a disappointing report on German business confidence.

"A rate hike this time could only hurt the euro, because the German economic outlook seems fragile," he said.

The German government has previously resisted calls for interest rate rises because of fears of its weak economy. But this week it raised its economic growth forecast to 3.5% next year, clearing the way for support for a rate rise.