Euro's decline puts pressure on pound

The pound has fallen to below 82p against sterling - the lowest in 14 months - as the euro hit another lifetime low yesterday, slumping to the equivalent of the deutschmark's weakest level for more than 10 years.

Yesterday's meeting of the European Central Bank did nothing to boost the euro, which fell back again slightly following comments from its president, Mr Wim Duisenberg.

The euro closed at $1.0360 from $1.0456 a day earlier and at 64.46p sterling from 64.99p. As a result, the pound closed at 81.79p against from 82.55p on Tuesday.

At one stage the euro dropped to $1.0335, just below the dollar/ deutschmark high of $1.0345 for the past 10 years, before rebounding before the ECB meeting.

The euro's decline is being fuelled by the central bankers' apparent lack of concern about the currency, which has dropped more than 13 per cent against the dollar since the start of the year.

There is also some ambivalence obvious from Mr Duisenberg's statement after yesterday's meeting. He said the central bank was not seeking a weakening euro but did acknowledge its benefits. "It is not something we strive for, but that it has a beneficial affect cannot be denied," he said at a press conference following the meeting.

And according to Paine Webber's investment director, Ms Alison Cottrell, there is no need for the ECB to worry. "If there is no inflation risk in the euro zone and no direct danger of imported inflation, then does a soft currency matter? No, not really.

"The irony is there for all those on the UK side who have said `look, the euro is such a soft currency and we've got such a nice hard sterling'. Nice? Whose problem is this?" she asked.

But the pound's decline against sterling has inflationary implications for the Republic, with analysts worried that inflation may be close to 3 per cent at the end of the year as import prices rise.

According to Mr Aziz McMahon, treasury economist at Ulster Bank, Mr Duisenberg did not give a convincing performance. "He first said the weakening was driven by the cyclical divergence in the euro zone and the US but later went on to say it was part structural and not cyclical."

He added that there seemed to be a lack of co-ordination between Mr Duisenberg and other board members. "But it is probably a policy of benign neglect to dig the German and Italian economies out of trouble but he cannot be seen to talk it down."

The euro was also undermined further as traders pushed it down in an effort to trigger computer-generated orders to sell it.

Meanwhile, statistics from the US pointed to an ever-growing economy. The market is now building in a rate rise on June 30th, with possibly another to follow, according to Mr McMahon.