Intervention talk revives euro

The euro has bounced back from recent lows, following talk of intervention and comments from UK central bank chief Sir Edward George.

The euro rose back above $0.85 over rumours that the European Central Bank, which four times in the autumn snapped up euros to boost the currency, was behind a new buying spree.

Traders had been alerted to the possibility of intervention by Ernst Welteke, president of Germany's central bank, the Bundesbank, who warned on Tuesday that the value of the euro must be "carefully observed".

However, it is now thought likely that the boost to the euro came from private investors, who were encouraged to buy by speculation that a fall in sterling might be engineered to ease entry to the euro.

Intervention possible

Intervention is still a possibility.

On Wednesday morning, ECB chief economist Otmar Issing described intervention as an available instrument to support the euro.

He also said that the ECB is interested in a strong single currency, adding that the euro's weakness could boost inflation.

However, traders have remained sceptical over ECB intervention.

"Obviously this is a signal of the ECB's displeasure at the level of the euro but I'm not convinced it's a precursor to intervention," Halifax economist Steven Pearson said.

"I think the ECB will be cautious about when and how it intervenes," he said.

Nevertheless, the market will remain alert to the possibility of intervention, added North Pacific Bank foreign exchange manager Toshikazu Shimamura.

Sterling fears

The euro was further underpinned by comments from Sir Edward George, governor of the Bank of England, on Wednesday.

In an interview with BBC News 24's new Business Today programme, he said that it would be "very difficult" for Britain to adopt the single currency at the current exchange rate with the pound.

The comments renewed fears that, with many members of the Labour government keen on the UK adopting the euro, a fall in sterling might be engineered.

Five-week highs

The euro hit five-week highs against sterling in afternoon trading in Tokyo.

Ed Balls, chief adviser to the Treasury, on Tuesday attempted to ease fears of sterling being massaged lower.

"Any short-term attempt to manipulate the exchange rate, overtly or covertly, would put both the inflation target and - as in the 1980s - wider stability at risk," he said.

He added: "The government's objective for the exchange rate remains a stable and competitive pound in the medium term."

At 1143 GMT, the euro was at $0.8550, up from $0.8540.