Euro continues to fall against sterling, dollar

The euro has fallen against sterling as British interest rates remained on hold

The euro has fallen against sterling as British interest rates remained on hold. The new currency has also closed down further against the dollar.

The euro closed at $1.0882 from $1.0926 and at 67.47p against sterling from 67.68p. As a result the pound closed at 85.70p against sterling from 85.94p.

The dollar remained strong, as markets reckoned the European Central Bank would defy political pressure and refuse to cut euro zone rates at its meeting today.

German Finance Minister Mr Oskar Lafontaine has repeatedly called for interest rate cuts to stimulate the euro zone's economy and create jobs. But a Reuters poll on Tuesday predicted a rate cut would happen within three months, not in the next month.


Dr Dan McLaughlin, chief economist at ABN Amro, pointed out that the euro rate against the dollar is equivalent to about $1.80 against the deutschmark. At those levels the Bundesbank would have been making it clear that they did not want it to fall any further, he said.

But with the euro, politicians in general are welcoming the decline in the currency, while no ECB official has yet made any public sign of distress.

The euro is now heading towards $1.07 which would translate to around 84.5p against sterling for the pound, according to Dr McLaughlin.

Markets are also focusing on the policy difference across the euro zone. And talk that German insurance companies are selling euros as a protect against German government proposals to increase their tax also hit the currency.

The lack of a move in UK interest rates, which had been broadly expected by financial markets, also boosted sterling. Analysts said it means the Bank of England has responded to recent data showing the recent slowdown in the economy may be bottoming out although its Monetary Policy Committee made no statement with its decision.

The Bank of England had cut interest rates in five successive moves between October and February from 7.5 per cent to the current 5.5 per cent level.

Dr McLaughlin pointed out that the Bank of England started referring to a "neutral interest rate" and the range they discussed was 4.5 per cent to 6.5 per cent. The current rate of 5.5 per cent is right in the middle of that target, he noted.

However, some economists said Wednesday's inaction by the Bank, ahead of next week's annual budget from Chancellor of the Exchequer Mr Gordon Brown, was merely a pause for breath.

"I think rates are going to come down further. It would be very difficult to criticise the Bank for an inactive policy when we've had five cuts in a row," said Mr Nick Parson at Paribas.

Mr Gerard Lyons at DKB International agreed: "This is not the end of the rate-cutting cycle. I think a rate cut was justified by the economy growing well below trend and inflation not a problem. Rates are going to go sharply lower this year, to 4.5 per cent at least."

Another problem for sterling, according to Dr McLaughlin, is that the market now believes it will enter the euro at 75p or the equivalent of about DM2.60. "That effectively puts a floor under it of about 71p or 72p at the moment given the interest rate difference," he said. "But it does not really have a ceiling and could strengthen on the back of a firmer dollar."