Latest German figures help euro to gain marginally

The euro has regained some modest ground because of signs that the German economy may be starting to recover.

After news that the German economy grew by 0.4 per cent in the first three months of this year, the euro gaining almost 1.5 cents to close at $1.0440 from a low of $1.0260 on Monday. It also gained against sterling closing at 65.10p to leave the pound trading at 82.65p sterling.

The rise in German GDP was well ahead of expectations - many in the markets had been predicting an actual contraction and the optimists were looking for growth of 0.2 per cent. It also underlined reports a day earlier, which showed that German manufacturing order had jumped by 3.3 per cent.

The euro was also helped by news that the UN, including Russia, has agreed a peace package for Kosovo.

According to Mr Jim Power, chief economist at Bank of Ireland, the euro needs evidence that the German and Italian economies are turning around before it can recover. "These figures were very good news for the euro but we will have to wait and see if manufacturing confidence and unemployment point in the same direction." he said.

He added that this might not be the beginning of a meaningful recovery. "It is likely that the euro will test the downside again and could still see parity."

Nevertheless over the next couple of days the euro could rise to $1.0550 and 66p against sterling but is the likely to encounter another bout of selling pressure.

The markets will also be closely watching Italian data over the next month or so. According to Mr Power, the Italian figures are likely to show that it is in recession.

And according to Mr Colin Hunt, chief economist at Goodbody stockbrokers, the euro also received a fillip from the incoming president of the Bundesbank, Mr Ernst Welteke. He surprised the markets by outlining his preferred level of the currency - $1.08.

"The starting rate for the euro which was carried with a certain enthusiasm was not the right level. To me, the exchange rate relation when one ecu was $1.08 was more appropriate."

According to Mr Hunt, what was most remarkable was that the markets took notice. "It seems that they still listen to the Bundesbank if not to the European Central Bank," he added.