The euro has staged its first three-day rally against the dollar since August following reports that Iraq will price its oil exports in euros instead of dollars.
Earlier, the currency had rallied on positive expectations that the pace of US economic growth would slow to fall in line with the euro zone. But it fell back slightly in late trading as strong personal income data rubbed the gloss off last week's growth figures.
European Central Bank council member Mr Ernst Welteke welcomed Iraq's decision and urged other nations to follow suit. Iraq's Oil Minister said the country planned to price its oil exports in euros from tomorrow. The UN sanctions committee meets today in New York to review the change.
If it works, Iraq's President Saddam Hussein could be on ECB president Mr Wim Duisenberg's Christmas card list, said Mr Michael Derks, international strategist at Commonwealth Bank of Australia in London. Rising oil prices denominated in dollars have been a major cause of euro zone inflation and are at least partly responsible for recent interest rate rises. Euro pricing would rapidly hold back inflation in all 11 euro zone countries.
Iraq informed oil customers to start making payments in euros from tomorrow. Baghdad has signalled it could stop oil exports if its request is denied. Baghdad's rejection of dollars, the currency of oil trading, appears part of a campaign against US support for the maintenance of UN Gulf War sanctions.
UN treasurer Ms Suzanne Bishopric said there "should be no restriction on selling Iraqi oil in euros because it is an international currency and Iraq has the right to choose any currency it wants to trade with".
The UN oil-for-food deal lets Iraq sell oil over a six-month period on a renewal basis to buy food, medicine and other humanitarian goods for the Iraqi people, reeling under stringent UN sanctions imposed for Baghdad's 1990 invasion of Kuwait. The eighth phase of the sale ends December 5th. Iraq's oil sales at current prices fetch about $60 million a day.
The euro rose to $0.8420 from $0.8393 on Friday, but down from a high of $0.8528 after the US reported unexpectedly slow third quarter growth. The euro's rebound was dented slightly after US dealers said the trend remained firmly to sell the euro. Speculation that central banks would buy euros also helped, some analysts say. Intervention is more likely to strengthen a currency if it reinforces a market movement, rather than fighting against it. But this may not be the case if central banks believe it to be only a temporary blip.
The markets are looking forward to US labour market reports this Friday for more evidence of a cooling off.
--(Additional reporting Reuters, AFP)
