Welteke hints at possible intervention to buoy euro

The European Central Bank might intervene again to prop up the euro, the head of Germany's Bundesbank said yesterday.

Mr Ernst Welteke's comments were seen as reflecting the ECB's desire to put a floor under the euro amid fears that its continuing weakness was feeding into rising inflation in the single currency zone. Analysts believe this may prompt another interest rate rise.

"We're watching developments on the foreign exchange markets very closely and will, if necessary, intervene again," Mr Welteke told WirtschaftsWoche, a weekly business magazine.

Blaming elements of the euro's troubles on "small-state thinking" among European politicians, he called for improved political co-operation. Its absence confused the markets and did not provide the support required to boost the currency.

As the euro hovered near 85 cents against the dollar - before closing at 84.74 cents in European trading yesterday, Germany's finance minister underlined Mr Welteke's comments, saying he favoured a stronger external valuation on the currency.

Mr Hans Eichel said this would cause fewer problems with import prices driven higher by its weakness, causing prices to rise.

In further comments seen as supporting the euro, the US treasury secretary said there could be a role for intervention in currency strategy.

Yet Mr Larry Summers said the treasury's general approach was to recognise that a strong dollar was in US interests.

He said: "Our general approach has been to focus on the fundamentals, to recognise that a strong dollar is in our country's interests and not to talk much more about it than that.

"That's what is ultimately most important for markets."

In Dublin, the chief economist at NCB stockbrokers, Mr Dermot O'Brien, did not regard the previous intervention by the ECB, the US Federal Reserve and Bank of Japan on September 22nd as a once-off measure.

"To the extent that they had concern, that concern is still there to a point," Mr O'Brien said. "When they took that position it wasn't just a one-trick deal.

"The only thing really is in the tactics and timing. For these things to work there has to be an element of surprise, and there was, definitely, the first time."

But Mr O'Brien's counterpart at AIB Group, Mr John Beggs, said there might be no appetite among US central bankers to intervene ahead of the presidential election there next week.

Mr Beggs said investors still regarded the US as a better long-term prospect - the fundamental factor in the euro's weakness which would act against a sustained rally. This was despite slow third quarter growth figures in the US released last week, which boosted the euro.

Meanwhile, Mr Eddie George, governor of Britain's central bank, yesterday denied taking a partisan view on Europe's single currency. Mr George told a House of Lords committee that he struck a pragmatic line on the euro, and was mindful of its potential advantages and disadvantages should Britain decide to join the currency club.

The Bank of England governor has a reputation in financial markets for being sceptical on the euro, giving the impression in the past that he has yet to be fully convinced by the economic benefits.

But Mr George gave a relatively upbeat assessment of the currency's performance, concentrating on strong growth in the euro zone economy rather than the currency's weakness which he blamed on long-term capital flows to the US.

"I think the prospect for continuing strong growth of the euro zone is really quite good. Basically, looking at the euro zone economy, I think it's not at all a bad performance, it's quite a good performance.

"What strikes me is that the explanation [for euro weakness] has more to do with long-term capital flows. It's not to do with the way the euro is being managed or short-term interest rates," Mr George added.