Euro hits fresh lows

The euro has fallen to a fresh low against the American dollar.

On Friday morning it dropped to 90.36 cents against the dollar, below the low of 90.60 it reached on Thursday.

It has now lost 23% of its value since its creation in January last year.

The slide came despite the European Central Bank raising interest rates by 0.25% to 3.75%.

The move had been widely expected, given the weakness of the euro and fears that inflation was set to rise in the euro zone.

Against sterling, it was worth 57.7p, slightly above the lows hit on Thursday.

In recent days, Europe's single currency has been on a constant downward trend, regularly breaching new lows against both the dollar and the Japanese yen.

The weakening currency could lead to higher prices for imported goods, raising fears of inflation in the euro zone.

'A big mistake'

Some traders now say it could soon slip below the 90 cents level.

"It was a big mistake. It was blindingly obvious what was going to happen if they raised rates," said Neil Parker, senior European economist at the Royal Bank of Scotland.

He said he could see the euro falling to 80 cents if interest rates were raised further, adding: "Its a bit like a steamroller on a very, very sharp incline."

But Bundesbank president Ernst Welteke told German TV that it was hard to imagine the euro falling significantly below 90 cents in the course of the year.

Sign of panicking?

Most market players had expected the central bank to raise rates - especially following comments by ECB president Wim Duisenberg.

"There can be no doubt in anybody's mind on what direction the next move will be," he had said.

This might explain the euro's reaction to the rate rise.

Some traders could interpret the bank's decision to raise rates as a sign that it is panicking.

The figures are so sparkling I have no fear for the euro

Gerhard Schroeder

Analysts say there is little the central bank can do to restore faith in the euro as US economic growth roars ahead of that in Europe.

"Given that the euro is unlikely to rebound strongly, we are likely to see further rises from the ECB. I don't think it is a question of supporting the euro. I think it is really a question of them offsetting the monetary impact of a weak euro," said Robert Lind of ABN Amro in London.

The ECB last raised rates on 16 March saying it needed to respond to growing inflationary risks resulting from depreciation in the euro, strong gains in oil prices and an upturn in the euro-area economy.

The weaker euro has already fed through into higher prices.

In the euro zone, inflation reached 2.1%, just above the ECB's 2% target.

Boost to dollar

In contrast to the euro, the dollar has remained strong in spite of record falls in US shares.

The US central bank is also expected to raise interest rates at its next meeting on 16 May, a move which will further boost the dollar.

German chancellor Gerhard Schroeder defended the euro on Wednesday, saying the "sparkling" performance of the euro zone economy defied the currency's record weakness.

"The figures are so sparkling I have no fear for the euro," he said.

His confidence is not shared by leading German financial experts who recently warned that the currency would continue to weaken in the absence of economic reform.