Euro continues decline against dollar and sterling

THE euro has fallen to another low against the dollar and has also lost ground against sterling. The euro continued its decline as the US economy outperformed expectations and European central bankers did not look poised to help by cutting interest rates at their meeting this week.

The euro slipped below $1.09 for the first time, although it later recovered slightly to $1.0931 from $1.1023 late on Friday, and to 67.92p against sterling from 68.46p. This left the pound at 86.29p against sterling from 86.93p.

The euro's slide against the dollar was exacerbated by data showing that US manufacturers are rebounding from a recent slump. The National Association of Purchasing Managers said its index of manufacturing activity rose to 52.4 in February, compared with a consensus forecast of 50.

According to Mr Jim Power, chief economist at Bank of Ireland, the data point to growth in the first three months of the year of over 5 per cent, following 6.1 per cent in the last three months of 1998.

He added that the euro is likely to continue to slide as low as $1.05, driving the pound down further against sterling.

There is also division over whether the ECB is likely to cut rates on Thursday, with most analysts predicting further falls whichever way the ECB goes.

The president of the ECB, Mr Wim Duisenberg, said yesterday that interest rates in the euro zone must be held steady. Referring implicitly to pressure from the German Finance Minister, Mr Oskar Lafontaine, for a reduction of rates in the euro zone, he insisted that "we must not allow our decisions to be conditioned by pressure from whatever source".

However, according to Ulster Bank, rates should nonetheless come down. Economist Mr Aziz MacMahon said the ECB will have to react to the recent fall in inflation in Germany and France to 0.2 per cent.

According to Mr Power, however, the ECB will be reluctant to cut rates because of the difficult political background, despite the strong economic rationale for a cut. At the same time sterling remained relatively weak as traders continued to focus on its likely entry to the euro, which it is expected to join at a much lower level.

The possibility that the Bank of England's monetary policy committee meeting today and tomorrow may deliver an interest rate cut for the sixth month in succession also weighed on sterling. British interest rates are now at a five-year low of 5.5 per cent after last month's half point reduction.

Analysts are divided over the likelihood of a further cut but most believe that, with the British Budget only a week away, the MPC can wait to see if fiscal or tax and spending policy is loosened enough to stimulate consumer spending.

British figures also showed consumer borrowing recovering strongly in January, while the latest Chartered Institute of Purchasing and Supply survey suggested export orders were beginning to pick up again.

The markets will also be closely watching the Office for National Statistics' average earnings index which is being reinstated today following its suspension amid concern over the reliability of the figures.