Euro continues to rise on back of Wall St declines

 

The euro has continued to rise as investors dump US stocks and dollars on fears of a US slowdown.

The euro has been the major beneficiary of the declines on Wall Street, closing at $0.9145 yesterday from $0.9056 a day earlier. The European Central Bank bulletin, released last night, was expected to add fuel to the currency's recovery in trading today. The bank underlined the continuing dangers from inflation and talked down the possibility of interest rate cuts in the new year.

However, it was critical of spending rises by euro-zone governments, which it said would fuel inflation.

The bank did not name offending states in its report but, in comments critical of Ireland among others, said the expansionary bias of fiscal policies in some cases was "inappropriate in the current macroeconomic environment, especially in countries where growth is dynamic and inflation high".

According to Mr Jim O'Leary, chief economist at Davy Stockbrokers, "rate cuts are not on the agenda yet".

The ECB reported that the risks to price stability in the medium term continue to be "on the upside". It also warned that the social partners across Europe could "rely on the commitment of monetary policy to maintaining price stability", implying that rates would not be cut if wages continue to rise.

Worries about a US slowdown provided the initial impetus for the euro's recent recovery but traders said it was now gaining its own momentum and was unlikely to fall below $0.90 for some time and could go as high as $0.95.

The euro is benefiting from safe-haven capital flows out of the dollar area. However, European equities have failed to make gains.

The US Federal Reserve is expected to cut interest rates in January and Washington's large surpluses mean there is plenty of room for tax cuts, which should prevent a hard landing.

Analysts fear price weakness could lead to dollar losses, which would then feed into further asset prices losses, producing a vicious cycle.