Euro plumbs new depths against dollar, sterling

The euro has touched new lows against the US dollar and sterling, as the markets focused on the continuing war in Kosovo and possible interest rate cuts.

The euro fell to $1.0683 during trading yesterday before closing the European session at $1.0708 from $1.0740 on Friday and at 66.05p sterling from 66.23p. In consequence the pound fell to 83.85p against sterling from 84.09p.

The euro has now fallen more than 8 per cent against the dollar and sterling since its introduction on January 4th. And according to Mr Colin Hunt, chief economist at Goodbody Stockbrokers, it could be heading towards parity against the dollar, if US data continues to strengthen and the interest rate gap between the two areas opens up.

Several factors were pushing the euro lower, he added, including the war and renewed evidence that the French economy was still weak, as well as growing expectations of an interest rate cut at next the European Central Bank council meeting on April 8th.

"The euro is suffering from the crisis in Yugoslavia and worries that it could be prolonged," said Mr Kirit Shah, chief market strategist at Sanwa International.

"There are more reasons to expect slower growth in Europe and that compares to strong growth in the US." Mr Brian Venables, senior bond strategist at ABN AMRO, said European states could end up paying for the war with Yugoslavia. "War is expensive and somebody has to pay for this conflict . . . a lot of this cost could be passed back to the European budgets," he said.

Since the "euro-zone" states did not have the budgetary scope to absorb such expenditure, it would be negative for euro markets, he added.

Expectations of an interest rate cut were also heightened over the weekend after the European Central Bank's chief economist, Mr Otmar Issing, warned of a slowdown in growth in the euro zone.

And notably, said Mr Hunt, he omitted the usual line that monetary policy was "appropriate for current conditions". It was more what was left out than what was said that was important, he noted. There have also been reports that the IMF has been leaning on the ECB to cut rates, a factor thought to have contributed to the last cut in December.

But the ECB may be reluctant to act if the euro is still on a downward trajectory.

Moreover, news yesterday that French manufacturing confidence had declined again also weighed on the euro - it was down for the seventh straight month and at its lowest in 2 1/2 years.

The survey by national statistics institute INSEE showed the outlook for future output worsened in March to minus 22 from minus 16 the previous month, while the personal outlook of those questioned worsened to minus two from four.

"This survey is bad. French industrialists are letting themselves follow the German example," CCBP economist Mr Marc Touati said.

At the same time, France acknowledged that the emerging markets crisis would constrain its economy this year but said it would still have stronger growth than its main partners in the euro zone.

The Finance Minister, Mr Dominique Strauss-Kahn, told the newspaper Les Dernieres Nouvelles d'Alsace he was cutting his 1999 growth forecast to 2.2 to 2.5 per cent from 2.7 per cent.