Euro still falling to dollar, sterling

The euro has continued to slide against the US dollar and sterling, as evidence mounts that the US economy will continue to grow more quickly than Europe. Yesterday afternoon the euro had fallen to its lowest level yet at $1.1224. This was down from late on Friday in New York, when it was changing hands for $1.1260 and more than 5 per cent below its peaks against the dollar, seen just after its January 4th launch.

At the same time it closed at 69.88p sterling from 68.92p on Friday, or the equivalent for the pound of 87.49p. One of the main reasons for the fall is that many currency traders expect the European Central Bank to lower interest rates in the near future, even as they see the US Federal Reserve possibly moving toward higher rates.

According to Mr Oliver Mangan, chief bond economist at AIB, only a month ago most people did not think the US economy would grow by 3 per cent this year, but given the 5.6 per cent achieved in the last quarter of 1998 and the very strong figures so far this year, such a growth rate is now seen as likely.

On top of that, US interest rates are higher than European rates, making the US currency attractive for many investors. He added that, while it is true that the UK is much weaker, sterling is closely tracking the dollar. "The strength of sterling is simply a reflection of the strength of the dollar," he said.

According to Mr John Beggs, chief economist at AIB, UK interest rates are still significantly above euro rates at 5.5 per cent. However, he added, it is contradictory that the euro should be weakening against sterling, given the weak state of the UK economy.

Indeed, sterling managed yesterday to shrug off weaker than expected UK December industrial production data. The manufacturing sector, which excludes oil and utility output, saw production fall 0.6 per cent on the month and 1 per cent year-on-year, a drop that economists said showed the sector was mired in recession.

The other factor undermining the euro, according to Mr Mangan, is that the exchange rate is not too important in trade purposes, given that about 90 per cent of the euro zone's trade is with itself.

The European Central Bank president Mr Wim Duisenberg recently said that Europeans will soon get used to thinking of the euro as simply a euro, the way Americans think of the dollar rather than as worth $1.13 or $1.14 or whatever.

As a result, both economists are predicting that the euro will remain weak for the first half of this year, although Mr Mangan said it has now probably almost reached the end of its current bout of weakness.

"We could see the pound falling to about 86p," he said. "But any lower and the ECB may take notice there is only so far they will want to take benign neglect."

The lack of policy initiatives to deal with high euro zone unemployment could means it will fall even lower, Mr Beggs warned.