Euro is still losing ground against dollar and sterling

The euro has renewed its fall against the dollar and sterling as concerns mount about Kosovo and fresh evidence emerges of the strength of the US economy. Sterling was also bolstered by expectations that British interest rates may not fall any further.

The euro closed at $1.0610 from $1.0680 on Friday and at around 66p against sterling from around 66.4p late on Friday. At the official European close, the currency was below 66p sterling, at around 65.87p. Chartists said sterling had the potential to extend its gains against the single currency as far as 65.13p. That would mean a level of around 83p for the pound against sterling.

Mr Pat O'Sullivan, economist at AIB, said the euro was lower on a continued weak outlook for the euro zone economy as well as fears that NATO countries would commit ground troops to Kosovo.

Mr Wim Duisenberg, European Central Bank president, failed to support the currency when he reiterated in a speech yesterday that interest rates would not be cut further. Analysts believe this means the economy will not improve in the short term.

Speaking to the European Parliament monetary affairs subcommittee, Mr Duisenberg said he expected euro zone inflation to average around 1.1 per cent in 1999 compared with the bank's expectations of around 1.5 per cent three months ago.

He also said he saw a one to two-year lag between the bank's decisions on interest rates and their economic impact and that positive effects of the ECB's halfa-percentage-point cut on April 8th were yet to materialise.

He also emphasised that European governments would have to take up the slack to boost growth. Mr O'Sullivan added that the euro was likely to go as low as $1.06 before recovering over the next six to 12 months.

On top of that, fears of a prolonged conflict in Kosovo were likely to lead to further weakness, as the safe haven currencies of the dollar and Swiss franc see the benefits. On the other hand, if ground troops are not committed and Yugoslav President Slobodan Milosevic withdraws, it should lead to a euro rally, he says.

Meanwhile, sterling continues to track the dollar as its economy still appears to be on the turn. Headline factory gate inflation pressures were stronger than expected in March, official figures from the Office for National Statistics showed yesterday.

UK output prices - the cost of goods leaving British factory gates - rose a non-seasonally adjusted 0.6 per cent in March for a 0.5 per cent year-on-year rise, against economists' expectations of a 0.4 per cent rise with the year-on-year rate at 0.3 per cent.