Bearish economic data from euro zone drags euro to 6-month low

The euro slid to its lowest level since November yesterday, undermined by unsettling economic data from the euro zone.

A sharp fall in the closely-watched Ifo survey of German business confidence initially appeared to leave the euro unharmed. But it did not hold up for long.

A wave of selling took the euro over a cent lower against the dollar to $0.866.

In early New York trading, the euro was trading around $0.864, around a cent and a half below its previous US close.

Traders said the latest fall left the euro in a precarious technical situation.

The euro has bounced off the $0.87 level several times over the past few months. Some analysts fear that speculative traders who have been betting on a rise in the currency since the end of last year might now be tempted to short the euro.

A larger combination of negative factors for the euro over recent sessions would have been hard to imagine.

Faith in the US economy is starting to revive, as shown by recent rises in US equities and a steepening of the yield curve.

Early predictions by euro-zone policy makers that their own economies would remain robust are looking increasingly hollow.

Inflation figures from the zone since the ECB's surprise rate cut earlier this month have been far from reassuring.

And this has further undermined the credibility of the European Central Bank, which had started to win the grudging respect of some traders for its strong line on inflation.

The re-weighting of the MSCI equity indices earlier this week was worse for the euro than expected. The increased emphasis on free floats in the equity market could cost the euro zone around $27 billion in capital outflows.

The euro's rally at the end of last year which was widely seen as a turning point is now a distant memory.

The euro stands around the levels at which the world's main central banks intervened to prop up the currency last September. It is barely more than 5 per cent above its all-time low against the dollar of $0.823.

This time round few think intervention is likely.

Comments by Mr Paul O'Neill, the US Treasury Secretary, yesterday added to the euro's woes. Not only was he upbeat about the prospects for the US economy; he also issued an emphatic restatement of the strong dollar policy.