Euro falls against dollar as investors take profits

The euro has begun falling again against the dollar as investors start to take profits and to focus on US corporate earnings.

European acquisitions of US companies, which will boost demand for the dollars needed to buy them, is partly responsible for the decline in the currency to a two-week low.

Further evidence that interest rates are on the increase in the euro zone failed to underpin the currency substantially, as it slipped to $0.9350 from $0.9417 late on Wednesday.

In its monthly report for July, which was published yesterday, the European Central Bank pointed out that price increases in consumer goods have recently been creeping into the inflation figures. These result from high oil prices and the weak euro and will continue to be passed on over the summer, it noted.

According to Mr Jim Power, chief economist at Bank of Ireland, the ECB's comments and news that Spanish inflation is up means there will be a rise in interest rates in September.

He added that the main problem facing the euro was that it has simply failed to capitalise on its upward momentum of a few weeks ago. It first failed to get through 97 cents and then this week could not rise above $0.9550.

"Anyone who bought into the euro over the past month has not made the gains they were hoping for and they are now taking whatever profits they can and are getting out," he said.

This is despite broadly positive news still coming from the euro zone and a growing expectation of further rate rises.

And according to Mr Eric Robin, head of foreign exchange at Lehman Brothers in London, merger and acquisition activity "on balance favours the dollar". But Mr Power said the capital flows issue is simply an excuse. "The UBS takeover of Paine Webber and the expansion of Deutsche Telecom in the US are both positive for the euro over the longer run."

He added that the fundamentals about the growing European economy ought to come back to the fore over the coming months.