Finance chiefs fail to halt euro slide

The euro has continued to come under heavy pressure on the foreign exchange markets despite a host of comments from European central bankers trying to talk it up, with the currency touching a new low of $1.0407.

According to Mr Glenn Davies, chief economist at Credit Lyonnais, investors are negative about the euro.

"In the longer term there are reasons to think it will strengthen, but that longer term gets longer and longer."

The euro closed at $1.0442 in late trade from $1.0470 the previous day and at 65.40p against sterling from 65.64p. As a result, the pound closed at 83.2p against sterling.

Mr Jim Power, chief economist at Bank of Ireland, said the decision to allow the Italians to overshoot their budget deficit target meant the floor had now been removed and the euro was capable of falling a lot further over the coming weeks.

According to a Reuters poll of economists, the percentage likelihood of parity between the euro and the US dollar by the year-end stands at 40 per cent. That compared with a 25 per cent likelihood when Reuters last asked the question on April 20th. Certainly, for the moment, the fundamental economic figures are supporting the US dollar. The US economy is still growing strongly with the Federal Reserve moving to a tightening bias last week - indicating it stands ready to increase interest rates.

Slow growth in Germany and Italy, by contrast, remains a concern and the ongoing conflict in Kosovo remains in the background.

In addition, there are fresh worries about the French economy. French gross domestic product grew by 0.3 per cent in the first quarter after an increase of 0.7 per cent in the fourth quarter of 1998 on an adjusted basis, the statistics institute reported yesterday.

Even the sight of European finance chiefs taking it in turns to calm foreign exchange markets left currency traders unimpressed. The ECB was even forced to deny it had called an emergency meeting.

But rumours persisted that central banks were selling US government debt to stockpile funds to prop up the euro through intervention.

The German finance ministry made a statement, saying starkly: "There is no cause for speculation about possible euro weakness."

And in what was seen as a veiled reference to concern about the Italian move, Bundesbank president Mr Hans Tietmeyer said the euro could be strong and stable "if politicians do their bit".

Acting European Commissioner Mr Yves-Thibault de Silguy also urged politicians to prevent "excessive swings" in the euro.

Earlier in the day, France's Minister for European Affairs, Mr Pierre Moscovici, said the euro's slide was within the "normal limits", adding that, if its decline was a threat to price stability, the ECB would have intervened already.

ECB governor Mr Jean-Claude Trichet also weighed in, saying the ECB was convinced the euro had the potential to be a "strong, stable" currency, a mantra he said ECB governors had agreed to repeat as the essence of the bank's strategy.

The Bank of England governor, Mr Eddie George, had another perspective in a statement seen as a warning shot on British entry to the euro zone.

The euro has yet to prove that it can work in the 11-nation euro zone, Mr George said, adding that it was "tremendously difficult" to envisage how Britain would fit into the project.

He added "the jury is still out" on how well monetary union was working and whether it would suit Britain.

With the perceived threat of central bank intervention to support the euro receding and with little or no sign of a turnaround in the fundamental economic trends, further losses looked inevitable.

"The simple reality is that it is impossible to identify any reason to buy the beleaguered euro at the moment and this does not look as if it is about to change," Mr Power noted.