The euro has fallen back slightly against the dollar as investors bet that the US economy will pick up again in the second half of the year.
Equity markets rose slightly on both sides of the Atlantic in European trading, boosting the dollar. The euro closed at $0.9417 from $0.9507 a day earlier. It had traded as low as $0.9385 before better-than-expected German unemployment figures boosted it. According to Mr Jim Power, investment director at Friends First, the euro is pausing for breath after its recent steady rally. He added it was likely to consolidate between $0.93 and $0.96 over the coming weeks.
"The direction of the euro firmly hinges on news coming out of the US which is likely to be euro positive. Retail sales figures on Friday will be disappointing and are likely to boost the euro again," he said.
Mr Power said the euro might take some time to reach parity against the dollar and was unlikely to go much beyond that.
He also questioned the growing consensus that the US would recover quickly. Morgan Stanley Dean Witter chief economist Mr Stephen Roach has produced a report stating that the world's largest economy is already in recession, which many economists define as two consecutive quarters of economic contraction. He says there is a 45 per cent chance of a global slowdown later this year.
But others are far more positive. Central bank governors from the Group of 10 nations meeting in Basel, Switzerland, this week said the US was likely to avoid a recession this year, although growth would slow. "The central expectation is that it will be a soft landing," said Bank of England governor Sir Eddie George. The euro has risen almost 15 per cent against the dollar since dropping to a record $0.8231 on October 26th, amid signs that the US economy is cooling faster than the euro zone. Sterling also gained a little ground against the euro yesterday as tomorrow's meeting of the Bank of England's Monetary Policy Committee comes into focus. There is some possibility of a rate cut but most analysts predict it will leave rates unchanged for a month or so. Sterling closed at 63.10p against the euro, leaving the pound at 80.10p from 80.49p a day earlier.
