Germany's stock market celebrated the resignation of finance minister Oskar Lafontaine in champagne style yesterday, but foreign exchange dealers were divided on whether the move would provide a sustainable cure for the weakness that has beset the euro since its January launch.
The single currency, which had gained two cents against the dollar on Thursday night, sank back again as analysts warned that the departure of the finance minister would not have an immediate impact on the main cause of the euro's lacklustre showing - the poor performance of the main euro zone economies compared with the US.
"This event is not automatically going to improve the outlook for Germany or for the euro economy," said Lorenzo Codogno of Bank of America, London.
Yesterday the euro, which had fallen from a post-launch high of $1.18 to $1.08 before recovering to $1.105 on Thursday night, was trading at $1.093.
However, the German stock market soared on expectations that the German government - which has clashed with the corporate sector on areas such as tax reform and the phasing out of nuclear power - would now take on a more business-friendly approach.
The main Frankfurt index roared ahead 10 per cent at one stage before settling back for a 5.5 per cent gain on the day. That could be good news for the euro in the longer term.
"Perceptions matter to the financial markets, and the perception is tht we are going to get a more business-friendly, growth-orientated, more sensible policy mix," Nick Parsons, currency strategist at the investment bank, Paribas, said.
Mr Parsons argued that German business confidence might now recover, boosting investment, promoting economic growth and in turn helping to underpin the euro. "This could be a turning point, even though all the problems have not gone away," he said.
Other analysts are concerned that if the Schroder administration sticks to its tax plans, sentiment towards the euro will stay depressed. Uncertainties about the ruling coalition could also have an effect.
Attention has now switched to the European Central Bank (ECB), which was embroiled in a public row with Mr Lafontaine over interest rates. Analysts believe the bank has more scope to cut interest rates now that Mr Lafontaine has resigned because it will not then be seen to be bowing to political pressure.
But many believe that it will hold off - at least for the time being.
Most analysts believe the bank will opt for a modest cut in interest rates before the summer. One concern for the ECB is likely to remain the level of the euro on the international financial markets but Mr Parsons argued that recent US and UK rate cuts had boosted the dollar and the pound.
"If people bought currencies just because of the level of interest rates, the rouble would be one of the world's strongest."
