Euro hits a 4-month high against the dollar as US slows down

 

The euro has risen to a four-month high against the dollar on growing evidence the US economy is slowing more quickly than the euro zone.

The currency broke briefly above $0.90 cents yesterday but fell back slightly on profit taking.

It made its biggest gains against the yen, which was broadly undermined after the Bank of Japan downgraded its assessment of the country's economy for the first time since July 1998, saying that the pace of the recovery had slowed somewhat due to a deceleration in export growth.

By last night's close, the euro stood at $0.8931, compared to 0.8976 at the end of last week. It was also worth 100.0150 yen and 0.6098 sterling, against 100.9750 and 0.6082 respectively on Friday.

According to Dr Dan McLaughlin, chief economist at ABN Amro, the euro is now likely to hold around these levels but is unlikely to make strong gains.

The markets expect the US Federal Reserve to move to a neutral bias at its meeting today and away from worries about inflation, implying that rates will be cut at the next meeting.

Press reports in the US even suggest that a rate cut is possible. However, it seems more likely that such a cut will be made on January 31st at the Fed's next meeting, according to Dr McLaughlin.

A report last Friday showed that US industrial production fell unexpectedly in November, giving the Fed another reason to consider cutting interest rates from the current 6.5 per cent.

Expectations for a rate cut increased after Fed chairman Mr Alan Greenspan said earlier this month that the economy was slowing, and hinted he was less concerned with inflation. Falls in US stock markets - the Nasdaq fell 9 per cent last week - may persuade the Fed to cut rates soon, analysts said.

One complicating factor for the Fed is that US president-elect Mr George W. Bush has promised massive tax cuts and such a sweeping fiscal loosening might make the bank more reluctant to ease monetary policy.

But analysts said the Fed was likely to want to act itself and not rely on tax cuts which could be some time coming. Mr Greenspan is on record as favouring reducing national debt over cutting taxes and traders were keen to hear what happened at a breakfast meeting between Mr Bush and Mr Greenspan yesterday.