Euro falls to seven-month low against rising dollar

The euro fell yesterday to a seven-month low against a resurgent US dollar as French economic growth undershot expectations and investors fretted about the political turmoil that could result from three critical European elections over the next 11 days.

Economists cut annual growth forecasts for the French economy, the second biggest in the euro zone, following a smaller-than-expected 0.2 per cent expansion in gross domestic product (GDP) in the first three months of the year.

The French GDP figures were "crystallising concerns about pervasive weakness in the euro-zone economy," said Julian Callow, economist at Barclays Capital.

The latest opinion polls show that voters in France and the Netherlands are minded to reject Europe's constitutional treaty in national referendums on May 29th and June 1st respectively.

The treaty, which contains a new set of rules for the enlarged European Union, can only come into force if it is approved by all 25 member states.

The latest opinion poll in France from BVA put the 'no' camp ahead with 53 per cent. This is the fifth successive poll with the 'no' vote in the lead, suggesting that an earlier rebound by the 'yes' camp has not been sustained in spite of vigorous campaigning from leading European politicians.

France's economy, previously among the euro zone's best performers, has slowed markedly this year. Italy has already plunged into recession.

The German economy expanded by 1 per cent in the first quarter, although that was seen as an erratic result.

With French growth still being hit by high oil prices and the delayed effects of the euro's appreciation late last year, economists do not expect any acceleration in the second quarter.

Yesterday, German Economics Minister Wolfgang Clement joined Italian counterparts in blaming his country's economic weakness on the European Central Bank (ECB).

Germany had become a "victim" of the ECB's drive for price stability and the central bank should take "a very close look" at the country's low growth rate, Mr Clement said in an interview. The ECB has kept interest rates at 2 per cent for 23 months but has ruled out further cuts.

However, currency traders said the euro's fall was primarily driven by the US dollar.

The dollar rose across the board amid continuing discussion that hedge funds and other speculators were liquidating dollar-funded carry trades as rising US interest rates make these positions more expensive to hold.