ECB unlikely to intervene to support euro against dollar

The European Central Bank has talked down the prospects of intervention to support the euro as the single currency faces into another tough week. On Friday the euro traded below $0.91 despite the publication of US employment data that points to a cooling of the US economy and reduces the likelihood of a rise in US interest rates.

The ECB decision not to raise European interest rates last week triggered a dramatic fall in the euro to within two cents of its historic low against the dollar of $0.8840.

In a interview with a German magazine published this morning, European Central Bank directorate member Mr Tommaso Padoa-Schioppa said that there is no logical basis for the weakness of the euro. "It is by definition difficult to give reasons for the euro's exchange rate development. Because if something is not justified then there are obviously no understandable reasons," he told Der Spiegel.

He implied that the ECB was not minded to intervene to support the currency. "The best way to react to irrationality (in foreign exchange developments) is by not allowing oneself to be infected by exaggerated nervousness," he said.

The ECB is not expected to take any action until after its summer break on August 31st when a interest rate rise of half a percentage point is expected.

The prospect that the bank will stand by and allow the euro to test new lows against the dollar in coming weeks will not be welcomed by the Irish Government. The Minister for Finance, Mr McCreevy, is relying on a stronger euro to reduce inflationary pressures in Ireland. Inflation is currently the highest in the euro zone at 5.5 per cent and expected to peak above 6 per cent this year.

In its Autumn statement, the Small Firms Association has warned that the continuing weakness of the euro could add another 0.5 per cent to their forecast figure of 5 per cent inflation for the year. The inflation situation "requires the Government and the social partners to be steadfast in their commitment to the wage aspects of the Partnership for Prosperity and Fairness," according to Mr Pat Delaney, the director of the SFA which is associated with IBEC.

Mr Padoa-Schioppa also criticised EU Finance ministers for "a certain lack of concern" about pursuing further budget cuts, instead allowing stronger growth to do the job for them.

"We shouldn't become fascinated by improvements in state finances that come only from growth effects - that advantage disappears as soon as the economy slows," he said, in what appears to be a veiled reference to Ireland.