ECB warns markets on euro

ECB president Wim Duisenberg says he will not talk about intervention until after it has happened

The euro has surged on foreign exchange markets, after the European Central Bank (ECB) bought euros worth $2.2bn to square its books.

The ECB insisted that this was "definitely not [an] intervention" but a technical exercise to maintain the "structure and risk profile" of the bank's balance sheet. The money came from interest payments on the ECB's foreign currency holdings.

However, the foreign exchange markets interpreted the action as a warning that intervention was possible, and took it as a hint.

The euro surged by more than one cent to $0.8692.

'Psychological over-reaction'

However, Bernhard Pfaff of Commerzbank in Frankfurt called the euro's gains "a psychological over-reaction".

He said the ECB had to make its announcement or its actions "would have been misunderstood as a camouflaged foreign exchange intervention".

Mr Pfaff predicted that the move "should not have a lasting or great impact on a longer-term basis".

Earlier in the day the euro had dropped close to its historic low, trading at $0.8564. Currency traders said the market was tired of speculation about intervention that had no apparent substance.

The ECB's board met in Frankfurt on Thursday, but decided not raise its interest rates. Two weeks ago the ECB raised rates to 4.5%.

The markets are now waiting for a statement on the weak euro and the high price of oil, which are causing inflationary pressures.

Strong eurozone growth

The weak single currency, meanwhile, continues to boost the economies of the eurozone as exporters find it easy to sell their goods.

According to Eurostat, the EU's statistics agency, the eurozone's gross domestic product grew by 3.8% during the second quarter of the year.

For the whole of the European Union, growth was slightly lower at 3.7%.

The figures look impressive, but pale in comparison with US growth rates of well over 5%.