Dip in German business confidence poses more problems for falling euro

The euro has continued falling as sentiment towards the currency remains poor. News that German business confidence has turned down also undermined the currency yesterday.

The currency closed at $0.9240, yesterday, down from $0.9338 on Tuesday, despite a small bounce as the US balance of trade deficit came in at $31 billion, far bigger than expected.

The weakening euro will maintain price pressures on the cost of imported goods, keeping Irish inflationary problems in the spotlight. The worsening position for the euro also adds to the likelihood of larger than expected interest rate rises.

This too is bad news for Irish inflation in the short term because it will add to the Consumer Price Index but over the longer term an interest rate of 5.5 per cent will cool the economy somewhat. But to deal with inflation, Mr Jim Power, chief economist at Bank of Ireland, said a rate of 8 per cent or more would be needed, given the economy's strong growth. Mr Power finds it worrying that the euro is failing to respond to good economic news from Europe. The risk is that each bounce in the currency will be sold into and it will move lower especially as market conditions are very thin in the summer months, he added. The dollar is also being buoyed by a turnaround in sentiment towards the equity market. Despite serious setbacks earlier this year, the technology driven Nasdaq is up almost 3 per cent to date, while the Dow is only down by just over 6 per cent.

But in the euro's favour is core inflation, excluding the impact of oil prices it is still good and consumer sales have been improving in many States.

But news earlier this week that euro zone inflation was running at 2.4 per cent in June form 1.9 per cent in May has strengthened expectations of large rate rises over the rest of this year. That would increase return on euro investment but traders also worry that it could kill off growth in economies which are only just rebounding. Most analysts do not believe the euro will end the year much above parity and even that is uncertain. As a result many feel they are better off buying dollars which pay a higher return and where growth in the economy remains stronger.

Sterling has lost some ground against the dollar but nevertheless remains very strong against the euro.

UK retails sales were up 0.7 per cent in June which was stronger than expected, but the minutes of the July Monetary Policy Committee meeting showed a nine to nil vote in favour of leaving rates unchanged.