ECB leaves rates on hold as euro rises

The European Central Bank (ECB) left interest rates unchanged yesterday as the euro rose to its highest level against the dollar for more than three weeks. The euro's strong performance followed fresh evidence that the US economy is slowing down and fears that the world's biggest economy could be heading for a hard landing.

The euro rose above 87 cents during trading in Frankfurt yesterday, more than three cents above its level at the end of last week. The ECB president, Mr Wim Duisenberg, predicted yesterday that the euro would continue to appreciate against other currencies in the coming weeks.

"It is clear that the present level of the euro does not accurately reflect the economic performance of euro zone. So we expect a correction," he said.

The ECB's decision to leave interest rates on hold came as no surprise to market analysts, few of whom expected rates to change before the end of the year. Some currency watchers predict a rise of a quarter of one per cent next year but Ms Sarah Lutgert von Trinkaus in HSBC Dusseldorf believes that the ECB may have abandoned its tightening bias.

"There will be no more increases. The next move in 2001 is more likely to be an interest rate cut," she said.

Slower money supply growth and signs of a downturn in the German economy mean that, as prices remain stable through most of the euro zone, higher interest rates could damage economic growth.

According to analysts, the euro has suddenly emerged as a safer bet given the weakness besetting the dollar and the tremors radiating from Turkey into other emerging markets.

The dollar, weakened earlier this month by the political paralysis over the protracted US presidential election, has been further undermined by concerns that years of serene economic expansion in the US could be about to come to an abrupt end.

The US economy grew an annual 2.4 per cent in the third quarter - the lowest for four years - according to the latest US estimates. The developments have ironically turned the euro into something of a safe haven, particularly with investors pulling out of emerging markets due to alarming panic on Turkey's stock and foreign exchange markets.

"People are becoming more risk averse," said Ms Jane Foley, a strategist at Barclays Capital. "There is a safe haven flow, and the euro zone is an area with a current account surplus, so with US growth slowing and the tech sector being weighed down, a lot of people are thinking it's time to bring the money home."

The euro is still languishing more than 25 per cent below its January 1999 launch value, and Ms Foley said it could suffer further through the medium term, predicting a year-end value of 0.83 dollars. But Mr Duisenberg disagreed, saying in an interview with a French weekly that the currency was set to bounce back.