Euro recovers some ground against dollar

The euro has gained some ground against the dollar as investors rethink their expectations of US rate rises

The euro has gained some ground against the dollar as investors rethink their expectations of US rate rises. At the same time, sterling pushed up against both the dollar and the euro, extending its rally prompted by Tuesday's British Budget.

The Budget was seen by the market as providing a much bigger boost to the British economy than predicted, mostly because of the surprise cut in the standard rate of income tax to 22 per cent.

The Chancellor of the Exchequer, Mr Gordon Brown, told BBC radio yesterday that the decline in the value of the euro was a cause for concern. "I share the concern of manufacturers about what is happening but these external factors are things over which we have no control."

The euro closed at $1.0965 from $1.0866 on Tuesday and at 67.34p against sterling from 67.43p. As a result the pound closed at 85.55p against sterling from 85.61p on Tuesday.

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Traders began to discount the idea of a rate rise in the US after the chairman of the Federal Reserve, Mr Alan Greenspan, said the economy was growing without any sign of inflation.

On top of that, according to Mr Colin Hunt, chief economist at Goodbody Stockbrokers, the rise in US long-term interest rates or bond yields was so great that it made a rate rise unnecessary.

He added that the tone of recent pronouncements from European central bankers indicated that rate cuts are off the agenda for now. And he argued that the euro's current value was comparable with where its constituent currencies were trading in 1998.

"Even despite the fundamentals, which are dollar positive, the market is simply returning to equilibrium," he said.

If the euro had existed in 1998 it would have averaged $1.1350 over the year, with a low of around $1.0780. After that, it benefited from emerging market turbulence and peaked just above $1.24, he said.

"It appears that the euro is simply coming from a position of strength and is not dramatically out of kilter in terms of fair value for the currency."

Another question mark over possible euro rate cuts is that much of the justification for them is the weak state of the German and Italian economies. However, according to Mr Hunt, much of this is due to the decline in heavy capital industries, which were hit by the emerging markets crisis. "There is little a rate cut can do to improve heavy industry," he noted.