Slight setback for the euro due to thin holiday trade

The euro pulled back a little from the highs it reached last week in thin trade yesterday due to holidays in the US and UK.

Analysts say the slight setback was expected but do not rule out a more substantial recovery for the euro later this year. The currency was also underpinned by a barrage of comments from European politicians and central bankers keen not to let the euro's gains slide away again.

The euro closed at $0.9260, down from $0.9278 on Friday at the European close. Dealers said any level above $0.9250 was good as that is seen as a key support level. A fall below $0.92 would be seen as disappointing.

"So far this is a correction. Whether it's a reversal of fortune for the euro, it's too early to say - but the gains have to be respected," said Mr Gilles Borrel, head of global treasury sales at Westdeutsche Landesbank in Paris.

Comments from Bundesbank president, Mr Ernst Welteke, among others also supported the euro. Mr Welteke reiterated that intervention was in the "toolkit of central bankers" and that he welcomed a rise in the euro regardless of how it came about.

French Finance Minister, Mr Laurent Fabius, also stressed that he and his European counterparts were not hostile to using all the "instruments" available to preserve the euro's value.

"We were not hostile, if necessary, to the use of the proper instruments to preserve this double objective: a solid, stable euro and low interest rates adapted to the target of strong, lasting economic growth," Mr Fabius said. And he warned that a further fall in the euro could lead to "inflationary tensions in our economies and lead in time to higher interest rates".

Another positive factor for the euro according to Dr Dan McLaughlin, chief economist at ABN-Amro, was EU balance of payments data which showed a small reversal to the large capital outflows of last year.

The data showed that portfolio flows are still very negative as fund managers sell European assets. However, last year's large capital outflows have been reversed and as a result the net outflow of money was diminishing rapidly.