German stock prices notch up strong gains

German stocks made strong gains yesterday as Frankfurt traders welcomed the smooth launch of the euro. However, some analysts were predicting that the success of the new currency could force the European Central Bank (ECB) to cut interest rates before the end of January.

The DAX rose by more than 4 per cent to reach 5,212 points by mid-afternoon, with shares in Deutsche Telekom soaring by almost 10 per cent and DaimlerChrysler gaining more than 5 per cent.

The German chancellor, Mr Gerhard Schroeder, welcomed the launch of the euro and expressed confidence that it would boost Europe's economy.

"I know the importance of this currency. I know that it will make Europe move forward," he said.

The euro traded at $1.18 yesterday but analysts predict that it could reach $1.30 during the next few months. Some German economists were predicting yesterday that the ECB was likely to cut interest rates for the euro zone during the first quarter of 1999, perhaps even by the end of January.

"The euro will go higher. This will put pressure on the European Central Bank to do something about it and this means that we've probably not yet seen the lowest interest rates in Europe," said Prof Norbert Walter, Deutsche Bank's chief economist.

The ECB president, Mr Wim Duisenberg, indicated last month that rates would remain stable at 3 per cent for the foreseeable future. But Prof Walter believes that a cut of 25 points could come by the end of January, followed by a further cut in the middle of the year. Commerzbank's chief economist, Dr Juergen Pfister agreed that rates are likely to come down as Europe's economy starts to slow down during the next few months.

"I think this is very likely as the nervousness regarding the economic outlook is still increasing. We expect more negative news to come and it is quite likely the European Central Bank will cut rates around this time," he said.