The euro fell to its lowest level against the dollar in seven months yesterday, following the European Central Bank's (ECB) decision to leave rates unchanged. ECB president Mr Wim Duisenberg gave no indication as to when it might reduce rates in the future.
This only served to put further pressure on the currency, which was trading below 83.6 cents last night, down more than one cent from its session highs. Speaking after the ECB governing council meeting, Mr Duisenberg also expressed concern at inflation rates in the Republic and the Netherlands.
It is a matter of concern to the governing council, the extent that this could have a spill-over effect in other countries, he said.
Mr Duisenberg appeared to have ruled out a rate cut as early as last Tuesday when he told the European Parliament in Strasbourg that there was no new data since the ECB's last meeting to support a rate cut this week.
He said the last quarter-point cut to 4.5 per cent in May was appropriate to ensure price stability, despite evidence of a continued decline in euro-zone growth.
Ahead of yesterday's ECB announcement, the euro fell to a seven-month low of 82 cents against the dollar but closed at 84 cents in European trading. However, when the US markets opened, the euro came under renewed pressure.
"I cannot explain fully the level of the euro. . . all the factors explaining the depreciation of the euro seem to have reversed, but this hasn't had an impact on the euro exchange rate yet," said Mr Duisenberg.
He reiterated that the ECB's role is not to tinker in the eurozone economy by cutting interest rates to stimulate growth but to ensure price stability and fight inflation.
Maintaining a favourable perspective for price stability is the best contribution monetary policy can make to fostering economic growth over the long run, he said.
Euro-zone inflation is still a major concern for the ECB, running at 3.4 per cent in May, well above the ECB target of 2 per cent.
It is likely that inflation will come down under 2 per cent next year but only just, said Mr Duisenberg.
That is reason enough for the ECB to continue its current policy and leave interest rates unchanged, he said. In his opinion, he believed the euro zone enjoyed low long-term interest rates.
The ECB has been criticised for surprising the markets with its decisions, something Mr Duisenberg said he tried to avoid this time around.
"I always say I don't want to surprise the markets but sometimes it's unavoidable. My statement in Strasbourg and today's announcement are part of a strategy of being as open as possible," he said.
Mr Duisenberg said he has spoken to countries such as Germany to raise his concerns about their "impetus" to adhere to the guidelines in the eurozone solidarity pact.
There was further gloomy news from Germany yesterday, where unemployment figures for June showed a seasonally adjusted rise of 22,000, the sixth consecutive monthly increase.
