The euro has fallen to another record low against the dollar following comments by Germany's Finance Minister, Mr Hans Eichel, which convinced traders that the European Central Bank was not about to intervene to prevent the currency's fall. The euro fell to $1.0151 in late trading after Mr Eichel said the euro's weakness was not a problem because it boosted German exports.
At the same time sterling also fell, touching $1.5536, its lowest level against the dollar since September 1996. Traders said it was a delayed reaction to the Bank of England's decision to leave the British benchmark interest rate unchanged.
There is little difference between British and US rates, but traders sold sterling on the grounds that US rates were likely to rise while British rates would remain low for the foreseeable future or even fall further.
As expected the Bank of England left interest rates unchanged at 5 per cent. At the same time, new US Treasury Secretary, Mr Larry Summers, said the US economy was strong and he foresaw no inflation threat.
News that the rate of investment growth in western Germany's industrial sector was likely to decline this year amid a slowdown in the economy, according to the Ifo research institute also weighed on the currency.
At the end of the session the euro closed at $1.0179 from $1.0225 and at 65.32p against sterling from 65.52p on Wednesday. As a result the pound closed at 82.94p from 83.19p.
In pushing the currency so low traders are now in territory always previously defended by the Bundesbank. When the deutschmark was still trading on the markets the Bundesbank almost invariably stepped in to shore it up when it reached levels around DM1.80. But now it costs DM1.93 to buy a $1, putting the deutschmark at its weakest level this decade.
However, according to Mr Nick Parsons currency strategist at Paribas Bundesbank, intervention used to work for the deutschmark, but intervention now by the ECB would be likely to provoke a barrage of selling.
"They do not want to be seen as having fought and lost a battle and are thus very unlikely to resort to actual intervention," he said.
Mr Jim Power, chief economist at Bank of Ireland, added that there was now a crisis of confidence particularly given the soundings from France this week about needing changes to the Stability and Growth Pact. "This is further evidence of a French plot to undermine ECB president Mr Wim Duisenberg. The euro is now likely to go to parity in a straight line next week and could fall to 98 cents," he added. "The only thing which would even temporarily halt its slide would be intervention and even that would not last long."
ECB officials have been focusing mainly on the euro's long-term prospects which they say are good. Also, the declining euro is supporting activity across the euro zone, particularly in weak countries such as Germany.
The bottom line is probably that while the 14 per cent fall against the dollar is not good PR and the market is getting excited about parity, it also suits much of Europe and does not really pose an inflationary threat.
