Euro hits a three-month peak against dollar

The euro has risen significantly against the dollar on continuing optimism about the European economy.

The euro has now broken through resistance to hit a three-month peak against the dollar, while jittery European share markets swung around yesterday's closing levels in thin and volatile holiday trade.

Markets are now waiting for tomorrow's key US jobs report for a fresh signal of direction of US rates.

The euro closed up around 1 per cent at $1.0763 from $1.0669 and at 66.27p against sterling from 66.00p on Tuesday.

As a result, the pound closed at 84.32p from 83.80p a day earlier.

Mr Oliver Mangan, chief economist at AIB Capital Markets, said further evidence that the European economy was rebounding supported the currency.

German wholesale sales were up 1.2 per cent at the end of June, while French consumer confidence rose again in July.

The Italian government also said its public finance targets looked conservative as the economy regained strength and it could "plausibly" outperform its 1999 budget deficit-to-GDP goal of 2.4 per cent.

On top of that, the dollar is suffering against the yen. The Japanese economy is not in great shape, Mr Mangan says.

But there are green shoots and, if that proves to be sustained, Japanese investors may stick to their own market and will, thus, not finance the large US current account deficit.

"The dollar was fine so long as people were willing to buy US assets to finance the deficit.

"Europe and Japan have more upside in equity markets, so on a medium term view you could see a reversion of flows back into Japan and Europe."

The dollar has been sliding against the yen since mid-July and earlier this week it caught the attention of Japan's Finance Minister, Mr Kiichi Miyazawa, and the US Treasury Secretary, Mr Larry Summers.

The pair held an unusual telephone call on Monday, agreeing that sudden shifts in currency values should be avoided.

But, while Mr Miyazawa hinted at the possible need for government intervention, a Treasury statement carried no such commitment.

Japan fears a stronger yen will increase the cost of its exports and thereby hobble its nascent recovery from recession.

In the US, investors see a weaker dollar heralding the flight of foreign capital, as European and Japanese financiers keep their money at home and thus provide less money to finance a huge US current account deficit.

That deficit is likely to reach about 3.5 per cent of Gross Domestic Product, according to Mr Mangan, or some $300 billion. "With world economic growth getting better balanced that will become more difficult to finance."

Investors fear that an abrupt movement out of US stocks and bonds will send share prices tumbling and bring down the curtain on the US expansion.

But other analysts believe the foreign appetite for US assets nonetheless appears healthy.