Euro falls to dollar on interest rate concerns

The euro fell to within one cent of its all-time low against the dollar last night on fears that European interest rate increases could be put on hold over concerns that the German economy is faltering. The influential Ifo index of business confidence, published yesterday, showed increasing pessimism among businesses in the west of Germany about future prospects for the second month in a row. The euro closed at around $0.8960 and is expected to test fresh lows over the coming days as the dollar strengthens.

The European Central Bank (ECB) will now have to decide whether to act in the interests of the euro-zone as a whole and raise rates or respond to the concerns on the largest economy in the grouping.

If the bank postpones an interest rate rise - expected as soon as next week - a hoped-for easing in Irish inflation may also be delayed. Irish inflation, which hit a 15 year high of 6.2 per cent last month, is predicted to fall later this year on the back of higher interest rates and a stronger euro.

"I expect that the Ifo survey will be relegated to second place in the bank's analysis. Looking at the bloc as a whole, growth is at 3 per cent which is 1 per cent above what the bank thinks is a sustainable non-inflationary level of growth. There is still a fifty-fifty chance that they will raise rates by up to half a percentage point next week," said Mr John Beggs, chief economist with AIB Treasury.

The ECB is also expected to take account of increasing inflation across Europe. Other economists were less optimistic. Bank of Ireland said that that the outlook for European rates has now changed. "A quarter of a percentage point rise by the end of the year is more likely than the previously expected half percentage point rise," according to Mr Niall O'Sullivan, economist with Bank of Ireland Treasury.

The Ifo survey reinforced a drift in the euro over the last few weeks in the face of a strong dollar.

The US authorities re-affirmed the strength of the US economy yesterday when they left US interest rates unchanged. The market interpreted the Federal Open Markets Committee (FOMC) stance as an indication that it believes the US economy is still heading for a soft landing.

The FOMC warned there was still a risk that inflation might creep into the booming US economy, leaving the door open for interest rate rises later in the year.

"The dollar will continue to appreciate against the euro and hold its ground elsewhere due to the balance of the US economy," said Mr Tim Fox, currency strategist at Standard Chartered Bank in London.