German news pumps up euro

The euro hit a five-month high against the dollar yesterday at $0.92, after an unexpected rise in German business sentiment sent the single European currency soaring.

Germany's forward-looking Ifo survey rose slightly to 89.8 in July -- marking its first increase in six months and surprising economists, who had expected another fall. Although far from robust, the Ifo number was seen as indicating that Germany's economic slowdown is not a deep-rooted as the US one is turning out to be.

"The fact that the Ifo was stronger than expected plays into this notion that perhaps all you're seeing in Europe is something of an inventory correction, whereas here in the States, things are more fundamentally wrong," said Jay Bryson, global economist at First Union National Markets in New York.

The dollar, which had risen for most of 2001 on hopes that a US rebound was imminent, has fallen more than 10 per cent against the euro and nearly 5 per cent against the yen in the past month and a half.

"The market is nervous that the Fed may have failed in its effort," said Jeremy Fand, global head of foreign exchange strategy at UBS Warburg in New York. He was referring to the US Federal Reserve's decision to cut interest rates on Tuesday for the seventh time this year.

There was further bad news for the dollar yesterday when the White House conceded that President Bush's tax cut combined with a weak economy have virtually erased the projected budget surplus. Last April, the Congressional Budget Office predicted a surplus of $281 billion for the year. The White House announced the surplus was now down to $160 billion, but President Bush defended his tax cut in a speech in Missouri yesterday.

"We took exactly the right action, at the right time, by pushing the largest tax cut in a generation," Mr Bush said.

The White House Office of Management and budget office blamed the slumping economy as the single biggest reason for the decrease in this year's surplus, attributing to it a $46 billion shortfall in revenues. Despite the reductions, White House budget director Mitch Daniels said the government's fiscal health was sound even as the economic woes continue. "The nation is awash in money, and it will be," Mr Daniels said. In fact, it was only due to an accounting change made by the White House last week that a surplus is showing at all. And Democrats are using the current figures to launch an all out assault on Mr Bush's economic policies.

House Democratic Leader Richard Gephardt said: "The Bush tax cut has wiped out the surplus, invaded Medicarer and stayed out of social security only by employing a ridiculous accounting gimmick."

The euro's continuing strong performance against the dollar was underpinned by Ifo which is seen as an indicator of growth prospects in the 12-member euro zone and is based on a survey of 7,000 German firms. Managers are asked to assess their business and their expectations and investment plans for the next six months from a total of 100 points.

Hope that Germany's slowdown is bottoming out may be shortlived, however, with the release today of second-quarter GDP figures from the federal statistics office. It is widely expected that the government will revise down its 2 per cent growth prediction if the data is disappointing. The Chancellor, Mr Schr÷der, has already tacitly admitted that growth will more likely be 1.5 per cent.

Last week the Bundesbank said growth had slowed to zero in the second quarter of the year, while another economic institute predicted growth of only 0.1 per cent for the same time period.