The euro lost a little ground against the dollar yesterday as central banks stood back and currency markets anticipated further intervention by them.
The euro closed in Europe at $0.8738 from $0.8803 on Friday as dealers began to test the resolve of the central banks to support the currency, which has gained almost 4 per cent in value since Thursday.
With "the market wary of intervention, there will be no significant attempts" to push the euro lower, said Mr Steve Barrow, currency strategist at Bear Stearns International. According to Mr Dermot O'Brien, chief economist at NCB Stockbrokers, the European Central Bank is likely to be holding some firepower in reserve pending the result of the Danish referendum on joining the single currency.
Danish support for adopting the currency is growing. The No camp's lead has been cut to 3 percentage points, according to the latest Gallup survey, compared with a gap of as much as 12 points last week. A separate poll by Vilstrup for newspaper Politiken showed support for the euro overtaking those against, 45 per cent to 43 per cent.
Apart from Denmark, Britain and Sweden are the remaining two nations among the 15-strong EU that chose to stay out of the euro on its initial trading day. Mr Pedro Solbes, EU Monetary Affair Commissioner, insisted yesterday that "if the Danes don't want to participate it would mean that it's a shame, but nothing more". And "the door for Denmark will remain open". Mr O'Brien added that the markets would be keen to test the resolve of the central banks but would not push the currency down too quickly. Doubts remain about how committed the Americans are to intervention, with the US Treasury Secretary, Mr Larry Summers, repeating last Friday that a strong dollar was in the interests of the US.
But further intervention is expected. Friday's surprise move coincided with the 15th anniversary of the Plaza Accord, when the industrial nations jointly intervened in the currency market. That 1985 round of dollar sales was conducted over 27 days.
However, there are fears the euro's gains will be short-lived, as US economic growth with low inflation continues to outperform the euro zone. The US economy will probably expand 5.2 per cent this year, compared with 3.5 per cent growth in the euro area, according to the International Monetary Fund. The low euro and high oil prices meant German consumer prices rose in September, boosted by heating oil and other fuels, putting renewed pressure on the ECB to raise interest rates.
Prices rose 0.4 per cent in September from August and 2.4 per cent in the year, their fastest annual rate since August 1997.
A stable euro would also be good news for Irish inflation, Mr O'Brien said. He added that the turnaround in the currency could have quick results.
In further good news for inflation here, the price of crude oil fell 4 per cent to its lowest level in a month after President Clinton ordered the use of oil from an emergency US reserve to bring prices down from 10-year highs. While the release of 30 million barrels from the Strategic Petroleum Reserve is fewer than four days of US imports, analysts said the move reflected the resolve to ensure consumers had enough heating fuel for winter.
