Pressure on ECB to back euro as slide continues

The European Central Bank is under pressure to intervene in the currency markets and support the euro next week, after the currency…

The European Central Bank is under pressure to intervene in the currency markets and support the euro next week, after the currency's dramatic slide continued yesterday. In New York last night it was trading at under 98 cents.

Investors are continuing to pour money into the dollar, prompted by fears of unbalanced growth in Europe and a feeling that European authorities are broadly indifferent to the plight of the euro.

In late European trading the euro fell through 97.79 cents, which had been a key level, equivalent to two deutschmarks under the pre-EMU system.

It also fell to below 60p against sterling, before rebounding slightly, as investors looked to likely interest-rate rises in both the US and Britain in the coming weeks.

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As a result the pound fell further to 76.48p against sterling, its lowest since February 1981, adding to fears that higher import prices will add further to inflationary pressures. Irish inflation is already running at 3.4 per cent, and if the euro remains weak it will lead to further rises in the months ahead.

Since staging a rally earlier this month, the euro has lost nearly 5 per cent against the dollar, shedding some 2 per cent in the last two days. Opinion is divided over whether it is likely to continue extending its losses in the next few weeks. Some dealers believe it is heading towards 90 cents, while others believe it will rally towards parity.

The ECB has come under increasing pressure to intervene and start buying the currency in an effort to prop it up. The Nobel Prize-winning economist, Mr Robert Mundell, yesterday urged the ECB to intervene. Speaking at the World Economic Forum in Davos, Switzerland, he said action would stave off higher import prices and wage demands.

It appears that the ECB is now seriously considering whether to intervene. Most observers believe the currency is now undervalued, and thus intervention would not necessarily be flying in the face of the market and would have a chance of being successful.

So far there has been little reaction from the ECB or EU leaders.

The ECB vice-president, Mr Christian Noyer, in Davos, refused to comment on the euro's fall, while the Bundesbank president, Mr Ernst Welteke, said the ECB did not neglect exchange-rate developments, as they were a key element of the bank's "twopillar" strategy.

Joint intervention between the Bank of Japan and the ECB to cap the yen and support the euro was likely to be more effective than unilateral intervention.

However, there were also fears that this strategy would not work. Mr Jim Power, chief economist at Bank of Ireland, pointed out that the Bank of Japan had already intervened at least 14 times since last June to put a lid on the yen, without any sign of permanent success.

In the absence of intervention, the attractions of the booming US economy and resilient stock market are enough to lure investors away from what are seen as riskier European assets. Even improving economic data in the euro zone, and statistics showing falling French unemployment in December, were not enough yesterday to stem the euro's decline.