The euro rose against the dollar and sterling yesterday after the President of the European Central Bank (ECB) Mr Wim Duisenberg assured Europeans that the new currency was a strong one and said the bank was monitoring the exchange rate very closely.
However, foreign exchange analysts warned that the euro would come under strong pressure if no initiatives to support the currency were announced at Monday's meeting of European Union economic and finance ministers.
"The euro-zone establishment has upped the ante over the past few days," said Mr Jim O'Neill, chief currency economist at Goldman Sachs in London. "If they fail to produce anything new, it will be a very ugly day for the euro. Action, not words, is needed now."
In an unprecedented statement addressed to the citizens of Europe, Mr Duisenberg said he understood concerns about the euro's continuing slide against other currencies and promised that the ECB would do all in its power to maintain price stability.
The euro staged a sharp recovery immediately after Mr Duisenberg's comments, rising to $0.8945 from $0.8905 shortly before his statement.
The remarks fuelled speculation that the ECB might intervene in the markets to boost the currency, which has lost nearly a quarter of its value against the dollar since its introduction last year.
The currency also gained from the weakness of sterling, which fell to its lowest level for almost four years against the dollar a day after the Bank of England held back from an expected interest rate rise.
But it was US employment data that saw the euro briefly rise over the $0.90 threshold in early afternoon trading. The decline in April unemployment, to 3.9 per cent from 4.1 per cent in March, increased the likelihood that the Federal Reserve will increase US interest rates on May 16th, possibly by as much as half a percentage point. By yesterday evening, the euro was trading at $0.8975 and also held its gains against sterling, ending the day at 58.7p, compared with a low point of 57.7p early in the day.
ECB monetary strategists say they can intervene in the markets in three ways - by unilaterally selling part of their vast dollar reserves; by co-ordinating such action with the US and Japan; and by intervening verbally, as Mr Duisenberg did yesterday.
Although the statement helped to boost the currency slightly yesterday, analysts are not convinced the recovery will last and some fear that Mr Duisenberg's dramatic address to the people of Europe could prove counter-productive.
The German Chancellor Mr Gerhard Schroder attempted yesterday to play down the currency's weakness and pointed out that the euro's low exchange rate helped German exporters. Speaking in the northern port city of Bremen, Mr Schroder recalled that, during the 1980s, the deutschmark's exchange rate also fluctuated wildly - at one stage reaching the equivalent of a euro rate of $0.72.
Mr Schroder offered no support to a call by the French Prime Minister Mr Lionel Jospin for the world's major currency blocs to co-ordinate action to boost the euro against the dollar.
Meanwhile, the influential speculator Mr George Soros, who in 1992 led an onslaught that drove sterling out of the European exchange rate mechanism, said it was time for the ECB to intervene.
Sterling fell to its lowest level against the dollar since June 1992 in early trading at $1.5322. Most analysts believe the euro will recover during the coming months and will regain parity with the dollar some time over the next year. But as long as the US economy continues to grow at its current pace and US interest rates remain high, nobody is predicting when the turning point will come.
