Up and Up She Goes


The euro continues its seemingly inexorable rise. This should surprise no-one since it is only a continuation of what has been happening for a year now. This time it seems people are starting to get nervous in Frankfurt and Brussels. What started off as a good thing, now could become a serious problem. Reading Greenspan yesterday it's clear that the US Treasury are likely to continue to encourage the dollar decline, which only leaves us with one question: now that the euro luminaries are waking-up to the problem, what do they propose to do about it? Oh yes, and going back to the petro-dollar theories, it's curious to note that the euro continues to rise despite the US having won the war in Iraq, and the oil markets being presumabley more dollarised than ever. One more duff theory out of the window?

The European Central Bank on Tuesday came under mounting pressure to cut interest rates as the euro surged to four-year highs and shrinking eurozone output continued to hold back recovery. The euro charged to $1.1358, up more than 8 per cent on the dollar since the beginning of the year, spreading alarm among exporters and prompting warnings that the soaring single currency could dent eurozone growth prospects. The euro's rise since December has wiped out the benefits of the ECB's quarter-point cut in rates in March as exporters face increasing competition for their goods. European stock markets have shrugged off the rise in the euro as investors have recovered their appetite for risk, pushing the French and German share indices through 3,000 for the first time since mid-January. London's FTSE-100 index of leading shares broke through 4,000 for the first time in four months to close up 1.4 per cent at 4,006.40.The case for another cut to boost sagging confidence when the ECB meets at its monthly governing council in Frankfurt tomorrow is now "overwhelming", economists said on Tuesday. ECB officials have played down prospects for any loosening, signalling rates are likely to remain at 2.5 per cent.......

ECB officials insisted the rising euro was "not a cause for concern at this time". But fears it may further depress already weak activity deepened when the Reuters/NTC Research purchasing managers' survey showed the dominant services sector shrinking for the third month running. The purchasing managers index for services remained stuck at 47.7 in April, well below the 50 mark that separates contraction from expansion. It was the lowest level since November 2001 and followed a sharp fall in the manufacturing index............

On the eurozone data, economists said the services and manufacturing surveys combined suggested the economy contracted in April despite a glimmer of hope from the expectations component of the index, which rose to a seven- month high."First quarter GDP growth was weak . . . the second quarter was probably negative," said Robert Prior of HSBC. He said the outlook "was all the more worrying" because the surveys were taken after the end of the Iraq war when activity should have been recovering.......
With the rising euro increasing the downside risks to growth, many economists believe the ECB might opt to cut rates by half-a-point in June when it will have updated its economic projections.The bank last cut rates in March when its growth forecast was revised down sharply to 1 per cent. But even that is looking increasingly optimistic, say economist, in the face of a strong euro and continued global weakness.
Source: Financial Times
LINK