Greenspan puts further pressure on the euro

 

The euro remains under pressure on international currency markets, following testimony by the US Federal Reserve chairman, Mr Alan Greenspan, to the US Senate Banking Committee.

The Fed chairman said the US economy was under strain and vulnerable to a pick-up in inflation and turbulence overseas, but that growth should nonetheless remain "solid" this year. He also said that a booming stock market suggested that share prices might be overvalued.

According to Mr Jim Power, chief economist at Bank of Ireland, the statement confirms the market in its view that the next move in US interest rates is upwards, although perhaps not for a while. For this reason, it is likely to underpin the US dollar on the markets.

"After eight years of economic expansion, the economy appears stretched in a number of dimensions, implying considerable upside and downside risks to the economic outlook," Mr Greenspan said in testimony.

He also pointed to mounting household and business debt. But, in the usual mixed message from the Fed, he also said that prospects remained good for this year,

"Our economy's performance should remain solid this year, though likely with a slower pace of economic expansion, and a slightly higher rate of overall inflation than last year, " he said.

In terms of the dollar, Mr Greenspan pointed on the one hand to the widening US trade deficit - which could eventually undermine it - and on the other that a strong currency was good news for imported inflation, as it would keep the cost of imported goods down.

Referring to the stock market, he warned that the US market may be overvalued and could even be displaying irrational exuberance.

He told the committee it was difficult to judge whether a market rise had turned into a fragile "bubble", except in retrospect.

"Whether or not it is gripped by irrational exuberance is an issue that you really won't know for sure except after the fact," he said in answer to a senator's question.

"But, as I indicated in my prepared remarks that I suspect that these markets are highly valued, it leaves me without terribly much doubt at this point."

The euro closed at $1.0990 in late trading yesterday from $1.1036 and at 68.45p against sterling. As a result the pound closed at 86.70p against sterling. According to Mr Power it may now stabilise around $1.09 but will fall lower over the next couple of weeks.

Events in Germany also put pressure on the euro. The finance minister Mr Oskar Lafontaine warned of deflationary risks if interest rates were not cut further. Meanwhile German public sector workers signalled strike action.

Around 20,000 German public servants are set to stop work today in a bid to turn up the heat on the government, while tomorrow buses and trams nation-wide are due for delays as drivers stop work.

The unions re demanding a rise of 5.5 per cent for Germany's 3.2 million public service workers.

Past industrial action by public sector workers in Germany has shown that the prospect of delays in public transport and uncollected rubbish on the street can be an effective bargaining device. The last all-out public sector strike was in 1992.

The latest round of stoppages comes barely one week after arbitration for the engineering sector produced a 4 per cent wage rise. Grudgingly accepting the deal, employers nonetheless complained it was too high given current economic weakness.

The markets will be worried that increased wage claims in Germany could blow a hold in the deficit and will undermine growth.