The euro has fallen again against the dollar as investors focused on the likelihood of further acquisitions of US companies by European firms.
Dealers pointed to the $7.6 billion (€6.44 billion) in cash that Deutsche Telekom, Europe's second-largest phone company, will need as part of a $55.7 billion agreement to buy VoiceStream Wireless.
A benign interest rate scenario following the Fed chairman Mr Alan Greenspan's comments last week is also fuelling the dollar, with many investors now looking to further equity market gains.
"In a world in which the US is heading toward a soft landing and mergers and acquisitions continue to go one way, I don't see the euro bouncing up," said Mr Jim McCormick, a foreign exchange strategist at J P Morgan. "It's all a very good story for the dollar." The euro fell to $0.9234 from $0.9341 on Friday.
On top of the Deutsche Telekom acquisition, ING, the Dutch banking and insurance company, said last week that it will buy units of Aetna in a $7.7 billion transaction that includes $5 billion in cash. "The merger and acquisitions story continues to be quite negative for the euro," said Mr McCormick. According to Dr Dan McLaughlin, chief economist at ABN Amro, there is now a view that US interest rates may not go up any further. He added that US employment and Gross Domestic Product data due out later this week will be the key to the dollar's short-term direction.
If growth comes in between 3 per cent and 4 per cent the market will be buoyed, according to Dr McLaughlin. With real incomes growth running at around 3.5 per cent, the same as last year, but inflation at closer to 4 per cent than 2 per cent, there has already been an erosion of real income gains. On top of that, according to Mr Greenspan, in testimony to Congress last week, the US economy is slowing, suggesting the Fed may soon be finished raising interest rates.
Over the longer run the prospect of fewer rate rises could dampen demand for the dollar by making US deposits less attractive to overseas investors. Still, the 6.5 per cent base rate is well ahead of the 4.25 per cent euro zone rate and Japan's near-zero rate. At the same time, German factories charged more for goods in June compared with May, and regional consumer prices rose in July, putting pressure on the European Central Bank to further increase interest rates as it strives to hold back inflation.
