A sharp fall in German business confidence yesterday failed to stop the euro reaching new highs against the dollar, prompting some speculation that the European Central Bank (ECB) might have to cut interest rates to save the euro zone's export-led recovery.
The euro surged above $1.32 in European trading yesterday, although the markets were quiet because of the US Thanksgiving holiday.
The Munich-based Ifo economic institute said its German business climate index had dropped to 94.1 in November, from 95.3 in October, the lowest for more than a year.
Ifo blamed higher oil prices and fears about the impact on exporters of the euro's appreciation.
Mr Dario Perkins, economist at ABN Amro, said that with German exports faltering and economic growth almost grinding to a halt in the third quarter, the country "desperately needs a recovery in domestic demand to prevent the economy falling back into recession".
But the stronger euro would increase pressure on companies to cut costs and keep unemployment high.
If inflation fell, a cut in interest rates "would be one way to get out of the problem of a rising euro", Mr Perkins said. Germany is the euro zone's largest economy.
Manufacturers' confidence also fell in Italy, according to the Rome-based Isae institute.
The ECB is expected to leave its main interest rates unchanged at 2 per cent for the 18th month running, when its governing council meets next week.
Despite the talk about a possible cut, the market consensus is still that the next move will be upwards, although the time frame has been pushed out until the second half of 2005.
However, bond markets are starting to contemplate a possible cut in European interest rates, with yields on 10-year German bunds near 17-month lows.
Economists said the story remained overwhelmingly one of dollar weakness amid concerns about the massive US current account and budget deficits.
"The perception is that the dollar has to fall and that the US authorities are happy for it to fall, and there is not much that the Europeans can do," said Mr Ken Wattret, economist at BNP Paribas.
The falling dollar gave further impetus to the gold price, which climbed through the $450 level to a 16-and-a-quarter-year high of $452.75. - (Financial Times/ Reuters)
