ECB unlikely to move to support euro

Senior EU government ministers and central bankers have again tried to "talk up" the euro, but the currency is expected to remain under selling pressure this week. Many analysts believe that parity with the US dollar is now a real prospect and while there has been some speculation that the EU central bank could step into the market to support the euro, this course of action is on balance seen as unlikely in the short term.

The French and German prime ministers, speaking after a weekend meeting, insisted that the euro would be a stable currency and, along with senior central bankers, insisted that the budgetary rules set in the stability and growth pact would be adhered to. One reason for the euro's recent weakness is the decision by EU ministers to allow an increase in the Italian deficit, which analysts say has damaged confidence in the pact.

The Bundesbank president designate, Mr Ernst Welteke, speaking over the weekend, said he did not think last week's decision by European finance ministers to allow Italy to book a higher deficit than stipulated by the euro stability pact should be repeated.

"A precedent should not be made out of this exception for the Italians. After all, public debt is a problem everywhere," Mr Welteke told Germany's Welt am Sonntag. He also said that intervention by the ECB in a bid to support the currency would be unlikely to be effective.

Leaders from both Germany and France said on Saturday that the euro was a solid currency and that its stability would not be undermined by the decision on Italy's deficit.

"What was allowed to Italy is a one-time decision. It doesn't mean that any of the member states want to stray from the firm stability path the governments in the euro bloc have gone down and will continue to go down," the German Chancellor, Mr Gerhard Schroeder, told reporters at a summit in Toulouse.

The Italian Treasury Minister, Mr Giuliano Amato, said Italy was not to blame for the weak euro, which hit a fresh record low of $1.0398 on Friday, more than 11 per cent below its launch level, before closing just over $1.04.

However, despite the words of support for the currency, many analysts believe that the euro is set to face further heavy selling pressure, with a crisis of confidence emerging in the management of the new currency and economic weakness persisting in the central euro zone economies.

Mr Jim Power, chief economist at Bank of Ireland group treasury, said yesterday that the euro could touch parity with the dollar within the next month. With sterling remaining strong, this could bring the Irish pound down from its current trading level of just under 83p sterling to around 80p, he forecast. This would be good for Irish exporters, but would push up the rate of inflation by fuelling export prices.

There was some weekend speculation of intervention by the European Central Bank in the markets today to support the euro - volumes will be low because the US and UK markets are closed, meaning the ECB could influence its value more easily in the markets. But Mr Power said that such intervention would just act as a signal to the markets to sell, as there were many fundamental reasons why the euro was weak.

Mr Welteke said the euro required "close monitoring", but that he was convinced the currency would recover. He also cautioned against highlighting the positive effect a weaker euro has on exports while ignoring inflationary risks.

Mr Welteke added that the euro exchange rate mirrored the divergent economic realities between the US and Europe and, therefore, was not "fundamentally wrong".

Central bank intervention was not a viable option in supporting a currency, he said. "Interventions against markets are, as a rule, ineffective," he said. However, some analysts believe that the ECB will have no option but to step in to support the currency if it falls much further.