Return to stronger euro on the cards

EURO weakness for the third day in a row does not necessarily mean the end of the dollar slide, analysts warned yesterday.

Since last Monday’s high of $1.2898 the euro tacked back to $1.2411 in late trading yesterday.

The dollar rise followed stronger-than-expected capital inflows to the US in November when overseas investors ploughed $87.6 million into US equities and securities. That compared with just $20m in October and the net effect was to push the euro down from an opening $1.26 to its lowest level for some time.

Will the slide last is the key question. Short-term maybe, but not for long is the prevailing view.

European Central Bank ambivalence was removed yesterday afternoon when an ECB source said the bank saw cutting interest rates as a last resort in the battle to stop the dollar slide.

Indications yesterday that there would be no rise in ECB rates to weaken the euro suggests the return to a stronger euro above $1.30 is still very much on the cards.

Analysts are calculating dollar earnings by Irish firms on the basis of an average rate for the euro of $1.25 for 2004.

Earlier yesterday, Italy’s deputy finance minister, Mario Baldassarri, said the ECB should either lower interest rates or sell euro to stem the currency’s rise to protect Europe’s economic recovery.

The euro, which has gained 18% against the dollar in the past year and rose to a record on Monday, fell this week after central bankers said they are concerned at its climb.

However, the later statement from the ECB discounting higher interest rates has put the intervention case to rest for the minute.

With the US closed until Monday, investors expect that when it reopens after the long weekend the dollar slide will kick in again.