Weaker German economy hits euro

The euro has fallen against the US dollar, following weaker-than-expected German retail sales.

Figures published yesterday show that the German recovery, particularly among consumers, may be weaker than many had been hoping, with a real 2.7 per cent drop year-on-year in September.

The figures also call into question the interest rate increase from the European Central Bank last week.

According to Mr Jim Power, chief economist at Bank of Ireland, these figures, along with weak manufacturing orders and output data over the past couple of weeks, point to a still struggling German economy.

"The ECB was mistaken in increasing rates by a half percentage point last week as the German economy is still proving quite fragile."

He added that it also means that the ECB should leave interest rates on hold for quite some time. "The ECB will leave rates on hold for at least six months and will probably not be able to raise rates by more than three quarters of a point in the second half of the year."

According to Mr Power the euro is now looking extremely vulnerable. It fell to $1.0324 from $1.0394 a day earlier and to 63.90p against sterling from 64.12p. As a result the pound fell to 81.16p sterling from 81.39p.

The euro has been under downward pressure which is thought to be due to a view in the US that the rate rise was a mistake.

In the US the situation is still very different. Productivity growth was up 4.2 per cent in third quarter annualised, compared with 0.6 per cent in previous quarter. Many analysts are now scaling back their expectations for a rate rise next week at the meeting of the Federal Open Market Committee.