Euro plummets in fear at EMU's future

The euro slumped to eight-month lows against the dollar yesterday on worries for the future of the European Monetary Union (EMU…

The euro slumped to eight-month lows against the dollar yesterday on worries for the future of the European Monetary Union (EMU)voiced at a meeting of senior German finance officials and negative outcomes of referendums on the proposed EU constitution.

The euro fell as low as $1.2218 in US trade, down from its overnight level of $1.2347, after a report that possible failure of the EMU, the system that gave birth to the euro, was discussed at a meeting attended by high-level German financial officials.

A source who attended the routine meeting last week said finance minister Hans Eichel and Bundesbank president Axel Weber were present but did not take part in any discussion on the future of the EMU.

The report, in Germany's Stern magazine, led the German central bank to issue a statement that it rules out the failure of the EMU.

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Ongoing questions about European integration and weak euro-zone economic data kept the euro under pressure and helped the dollar post broad gains.

The euro-zone manufacturing purchasing managers' index fell to a 22-month low of 48.7 while growth in Ireland's manufacturing sector dwindled to 50.3, its lowest in the current 21-month cycle of expansion.

The Irish index also recorded its first fall in employment prospects in 16 months, with the reading slipping to 48.9 in May from 51.0 a month earlier. Any figure above 50 indicates growth while a number below that level denotes contraction.

It was the second month running that the euro zone's manufacturing sector shrank as demand softened both at home and abroad and new orders dried up.

Of the bloc's three biggest economies, output fell in France and Italy. Germany fared better, as restructuring paid off.

"Germany's competitiveness appears to have improved relative to its neighbours, and therefore perhaps things are holding up a little bit better in Germany than elsewhere," said Holger Fahrinkrug at UBS in Frankfurt.

Surveys also showed manufacturing sector growth slowing in Britain, China, Russia and the Czech Republic.

Growth in the US slipped more than expected last month to its slowest pace in nearly two years, raising concerns about the US economy's strength, but not enough to dent the dollar's advance.

The Institute for Supply Management said its index of national manufacturing activity fell to 51.4 in May from April's 53.3. Analysts on average had predicted the index to come in at 52.1.

May marked the 24th straight month that the ISM index had been above 50, the longest such streak in 16 years. However, the latest reading is the lowest since June 2003, when it was at 50.4.

Separate figures published yesterday showed that the euro-zone economy grew slightly less than expected in the first quarter and prospects for the second quarter darkened further as the European Commission again cut its growth forecast.

Eurostat said gross domestic product in the 12-nation single currency area rose only 1.3 per cent year-on-year in the first quarter of 2005, less than the 1.4 per cent estimated previously.

The euro-zone unemployment rate remained stuck at 8.9 per cent in April for the third time in a row with 13 million people out of work, underscoring the challenge of getting consumers to spend and spur growth.

The EU Commission cut its growth forecast for the second quarter for the second time by 0.1 of a percentage point to 0.1 to 0.5 per cent but retained a 0.2 to 0.6 per cent estimate for the third quarter.

The bleak figures showed the euro zone's economy continued to be harmed by the demand-curbing high oil prices and the strong euro, which undermines exports.