Euro strengthens as dollar loses favour

The euro has continued to rebound strongly as the markets turn negative on the dollar. However, it is weakening once again against sterling.

The new currency closed at a three-month high of $1.0714 in late trading from $1.0635 a day earlier. However, it fell against sterling which took off once again, closing at 66.40 pence from 66.79 pence. As a result the pound closed at 84.31 pence.

Growing signs of economic recovery in Europe and Japan as well as mounting inflationary pressures in the US mean the dollar is likely to come under increasing pressure.

The Dow also fell on the US data, closing at 1,0790.97, down 1.65 per cent.

According to Paribas economist Mr Nick Parsons, the main problem for the dollar is there is no longer any guarantee that US asset markets will be able to entice sufficient funds into the US to mask the country's enormous current account deficit.

"With growth elsewhere, the fact is there are now alternatives. The US is no longer the only place you can put your money," Mr Parsons said.

"For six months we had a win-win situation for the dollar. Whether the data was strong or weak the dollar rallied. I now think we've moved into a lose-lose situation - whether the data's strong or weak the dollar's going to fall."

He added that there are still a lot of corporates who haven't participated in this move and it looks as if the euro will move higher very rapidly.

And according to Mr Aziz MacMahon, economist at Ulster Bank Markets, the dollar is now in the worst possible position. Data released yesterday showed that the economy is growing more slowly than predicted while inflationary wage pressures are picking up.

At the same time French business confidence is booming and the British economy is growing faster than expected. Data from Insee showed the French business confidence indicator rebounded strongly in July to rise to +13 from -10 in June.

He added that there were rumours in the market that the Bank of France had stepped in to halt the euro's rise at $1.0720, although it may have only been in the market for technical reasons.

At the same time, British GDP rose 0.1 per cent in the second quarter for a year-on-year increase of 1.2 per cent, compared with previous estimates of a flat quarterly performance and annual growth of 0.7 per cent.

"This means the next move in UK rates is definitely up, probably next year," Mr MacMahon said.

A Reuters poll of economists found that growth in the euro zone economies could catch up with the US rate by the end of next year and conceivably overtake it in 2001.

The employment cost index, one of Fed chairman Mr Alan Greenspan's favourite indicators, rose 1.1 per cent in the second quarter. Economists had expected an increase of only 0.8 per cent, compared with the rise of 0.4 in the previous report.

The second-quarter GDP rose 2.3 per cent compared with a rise of 4.3 per cent. An increase of 3.3 per cent was expected.

At the same time, confidence in Japan's economy was given a boost by yesterday's industrial production data. The June industrial output rose 3.0 per cent, compared with a 1.0 per cent fall in May.