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Monday, 28 February, 2000, 17:44 GMT
Euro rebounds from record low
Investors lose faith in the currency
Investors lose faith in the currency
The euro has plunged to a record low against the dollar, only to rebound again to Friday's levels.

In early trade on Asia's markets, one euro bought 93.9 cents, compared with 97 cents on Friday.

But as the foreign exchange markets opened in Europe and America, the currency regained some ground and during most of the day one euro was worth just under 97 cents.

Traders blamed the currency's volatility on large-scale euro/yen selling by US and European short-term investment funds.

However, the euro's weakness weighed on European stock markets, which saw share prices slide.

Kit Juckes, currency strategist at NatWest Financial Markets in London, said: "Unless it moves through at least $0.9800 the euro is still in considerable trouble."

But Bundesbank vice-president Juergen Stark said the European Central Bank should not be drawn into action by what he called "short-term developments".

The ECB's council meets on Thursday and there has been speculation that it could raise interest rates to shore up the euro.

Sticking to their guns

The euro's fall was discussed at a meeting of finance ministers from the 11-member eurozone on Monday.

However, they simply stated their belief that the currency would appreciate as the European economy gains strength, just as they did at their previous meeting in January.

"I will say exactly what I said one month ago," said Portuguese Finance Minister Joaquim Pina Moura, who chaired the meeting.

"The European economy is a strong economy ... and we are sure that a strong currency will go hand in hand with a strong economy."

Other finance ministers have tried to play down the euro's fall as well.

Dutch Finance Minister Gerrit Zalm said he was "definitely not worried" about the exchange rate.

The weaker euro comes amidst heightened expectations that the Federal Reserve will raise interest rates, boosting the dollar.

Many investors had hoped that the European Central Bank would raise interest rates to help prop up the euro.

The European Central Bank meets on Thursday, when it may decide to raise interest rates.

To raise or not to raise?

"With the euro at these levels, they (the ECB) will be very unhappy," Neil Parker, Treasury economist at Royal Bank of Scotland said. "If it slides to 90 cents, the ECB would have to intervene because it would be a snowballing effect."

The European Central Bank has raised interest rates twice since the single currency was launched at the beginning of last year.

It put up interest rates earlier this month by 0.25% to 3.25%.

The move was partly prompted by the currency's continued weakness which could herald inflation.

The ailing currency has fallen nearly 20% against the dollar since its launch at the beginning of last year.

A weaker euro could lead to eurozone inflation going through its 2% ceiling.

Raising interest rates tends to buoy the local currency by boosting returns on investments in bonds denominated in euros.

But it also cools an overheated economy by making it more expensive to borrow money.

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See also:

03 Feb 00 |  Business
ECB puts interest rates up
03 Dec 99 |  Business
When is a weak euro a problem?
30 Dec 99 |  Business
The euro's troubled first year
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