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The BBC's Dharshini David
"Central Bank's decision not to cut rates failed to surprise"
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Thursday, 24 May, 2001, 09:24 GMT 10:24 UK
Pound hits six-month low
Pound coin and US dollar
The pound falls against dollar on manufacturing fears
The pound has shed half a percent to hit six-month lows against the US dollar, while the beleaguered euro recovered from heavy falls overnight on rumours of central bank intervention.

The pound fell slightly against the euro but stayed just a fifth of a penny away from this year's high - set on Wednesday when the single currency tumbled on bad economic news from France and Germany.

The currency markets appeared nervous ahead of the release of the Confederation of British Industry's report on the manufacturing sector due at 1000 GMT.

"We're expecting the CBI report to be on the weak side and this could be negative for sterling," said Jeremy Hawkins, chief economic adviser at Bank of America.

At 0730 GMT, sterling was trading around $1.4125 after hitting six-month lows just below $1.4110 in the Asian session.

Euro rises

The euro has rebounded one percent against the dollar after it fell to $0.8555 in Asian trade, its lowest level since November last year.

Rumours of intervention in the currency markets by the Bundesbank and the Bank of Japan, combined with supportive comments by the Japanese Finance Minister Masajuro Shiokawa, helped the euro bounce back against the dollar.

In October the euro reached an all time low of $0.8230.

The slide, which started ahead of a decision by the European Central Bank to maintain interest rates at 4.5%, has been blamed on a clutch of data hinting that Europe's major economies may be growing slower than analysts had predicted.

French slowdown

The French economy, which many observers have viewed as a beacon of hope, grew by a disappointing 0.5% in the first three months of the year, compared with the quarter before, a report showed.

Laurent Fabius, French finance minister
Laurent Fabius: economic growth "disappointing"
Official statisticians, who also revised down growth for the last quarter of last year from 1% to 0.8%, said the "surprising data" reflected a fall in corporate spending as bosses tightened purse strings.

And Laurent Fabius, French finance minister, said the "disappointing" figure could see economic output, or GDP, grow by less than the 2.9% forecast by the government.

Below forecasts

Analysts were further disheartened by figures showing that the German economy, the largest within the eurozone, had an annual growth rate of only 2% between January and March.

The figure, the lowest since autumn 1999, heightened fears that the German economy will expand this year by less than the officials have predicted.

The government recently downgraded its official forecast for economic growth from 2.75% to "around" 2%.

Inflation data also revealed on Wednesday intensified the gloom over the German economy, showing that prices were 3.5% higher this month than in May 2000.

This figure was the highest since December 1993.

Inflation fears

Disappointingly high levels of inflation within the eurozone have dissuaded ECB chiefs from reducing interest rates, and so helping to revive flagging economic growth.

The ECB's decision on Wednesday to keep interest rates on hold was widely expected by economists.

Two weeks ago, the ECB surprised markets by lowering the rate from 4.75% - its first cut in two years.

Economists and politicians have criticised the bank for waiting so long to make a cut to shore up the economy, and for its lack of transparency.

High interest rates are viewed by economists as a key weapon in the fight to trim price rises.

Eurozone inflation, which the ECB is charged with keeping below 2%, stood at 2.9% in April.

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22 May 01 | Business
German business confidence slumps
27 Apr 01 | Business
French economy outshines Germany
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