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The BBC's Greg Wood
"It will also make a rise in UK interest rates more likely"
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Friday, 22 September, 2000, 13:28 GMT 14:28 UK
Central banks prop up euro
chart showing the euro against the US dollar
The European Central Bank, US Federal Reserve, Bank of Japan and Bank of England have joined forces to support the single currency, the euro.

As a result the euro gained more than 3 cents against the dollar, rising from a recent low of $0.8440 to 0.8936, before sliding back by a cent.

On the initiative of the European Central Bank, the monetary authorities of the United States and Japan joined with the European Central Bank in concerted intervention in exchange markets

European Central Bank
The fact that four of the world's most important central banks have now acted together shows the deep level of concern about the euro's persistent weakness.

The intervention comes at a crucial time, just one week before a referendum in Denmark on whether the country should join monetary union.

It also comes at an awkward time for the Federal Reserve, with just over a month to go before presidential elections.

And there are ambivalent signals as to whether the United States is wholeheartedly behind the action.

US Treasury Secretary Larry Summers said his policy on the dollar was unchanged: "As I have said many times, a strong dollar is in the national interest of the United States."

Market reaction

It is the first time that central banks have intervened to boost the euro, which has fallen more than 27% in value against the US dollar since it was launched in January 1999.

Market watchers described the intervention as "highly significant".
Euro trader
The intervention took traders by surprise

Glenn Davies of Credit Lyonnais said it would put "a floor under the euro", especially as the Federal Reserve had joined the action.

The move caught the markets unawares. On Thursday there had been a brief surge in the euro, as traders expected a strong statement in support of the euro from the G7 summit in Prague.

But soon traders convinced themselves that the world's seven wealthiest countries would not act after all, and the euro began to slide again.

According to Minoru Ozawa of Sakura Bank in London, "everyone was thinking there would be no joint intervention even after the G7 meeting". As a result, he said, there was now "a bit of panic buying" which could push the euro to "much higher ... levels".

However, not everybody is convinced that this was enough to save the euro. Analysts said central banks would have to push the euro well above $0.95 to really turn around the trend.

Ralph Solveen of Commerzbank in Frankfurt said the participation by other central banks besides the ECB had raised the chance of success.

But he warned the move could be counter-productive: "On one side, it shows the euro needs help, which is not a sign of strength for the euro. But on the other side, it could lead to fear in the market that further interventions are on the cards."

Joint action

Market analysts had always argued that an intervention by the European Central Bank alone would be doomed to fail, while the US Fed was seen as unlikely to move against the strong dollar before the presidential elections in a month's time.

In a statement, the ECB said: "On the initiative of the European Central Bank, the monetary authorities of the United States and Japan joined with the European Central Bank in concerted intervention in exchange markets."

It is unusual that the banks formally announced their intervention. Normally the news emerges when traders see buy or sell orders being placed on the market.

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See also:

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