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The BBC's Max Foster
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Thursday, 4 May, 2000, 09:16 GMT 10:16 UK
Euro under pressure

Europe's single currency, the euro, has come under renewed pressure on foreign currency markets after it plunged to a new low against the US dollar, falling below $0.90 for the first time.

The euro touched a low of $0.8853 early on Thursday before recovering slightly on rumours of intervention by the European Central Bank.

The euro has now lost 23% of its value against the dollar since its launch in January 1999.

And the pound has also hit a record high against the euro, increasing the pain for UK exporters.



Investors have lost all confidence and there is a desire to get into something that will hold its value

Neil Parker, Royal Bank of Scotland

The euro was trading at 56.29p, which means that 1 is worth 3.41 Deutschmarks, a 14 year high.

Ian Stannard of Chase Investment bank predicted that the euro could fall as low as 55.75p.

Traders say that the prospect of fresh interest rate rises in the US and the UK has persuaded many investors to flee the currency.

Further pressures

Now that the euro has fallen below the psychologically-important 90 cents level, brokers expect the currency to fall even further during coming days.

Euro buying is so far confined to profit-taking, making the prospects of an immediate recovery look slim.

For more than a year, a majority of economists predicted the imminent resurgence of the single currency - but it never materialised.

Market observers say that by now even long-term investors have lost faith in the prospects of the currency.

Neil Parker, a senior European economist at Royal Bank of Scotland, said: "Unless the European Central Bank performs a miraculous rescue mission, anyone on board the euro may as well be on board the Titanic.

"Investors have lost all confidence and there is a desire to get into something that will hold its value, like the dollar or the pound", he added.

Not good enough

The sharp drop comes despite good economic news from the eurozone, where growth is predicted to weigh in at about 3-4% this year.

Inflation is low, unemployment is falling and analysts say that the economic performance of eurozone countries is beginning to converge.

However, these figures pale compared to the much more dynamic US economy.

Rate worries

Another factor is interest rates. In the United States, inflation is creeping up and the economy is on the verge of overheating. This has pushed up rates.

They currently stand at 6% and are expected to go up again when the Federal Reserve meets on 16 May.

In the UK, rates are edging up as well, due to inflationary pressures.

The eurozone's 3.75% interest rate is low by comparison, and makes investment there less attractive.

Another reason is capital flows, with eurozone companies buying foreign currencies when investing massively abroad.

Green light for Greece

Experts also point to worries about the impact of weaker economies like Greece joining the single currency.

On Wednesday, the European Commission recommended that should Greece join the euro next year. The European Central Bank, however, warned it had "ongoing concern" about the country's progress in meeting key monetary union criteria, especially on debt levels.

The spectre of countries like Poland, Hungary and the Czech Republic joining the European Union - and the euro - is also said to make some investors think twice.

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