Pessimistic Germans add to euro’s weakness

HAVING hit a nine-month low on Monday against the dollar, the euro fell further to $1.2041 yesterday despite earlier gains.

The dollar initially weakened against the euro, but regained strength during the day.

Earlier in the day, the dollar dipped against the euro, boosted by remarks from the Greek Central Bank whose governor dismissed the need for the European Central Bank to cut interest rates. As a result, the euro rose to $1.2129 in early European trading, up from $1.2111 in overnight trading in New York.

Greek Central Bank governor Nicholas Garganas said the risk to inflation was on the upside and talk of cutting European Central Bank rates did not arise in the current environment.

“It would not make sense to have a discussion on the hypothetical issue of a possible rate cut,” he said, adding “there is no reason to change rates”.

The ECB has held its central refinancing rate steady at 2% for the past two years, but it has come under increasing political pressure for a reduction in borrowing. Some of the concern, reflected in the No votes in France and Holland, has to do with deep worries about jobs and living standards into the future and a general fear about the ability of the eurozone to demonstrate any real signs of recovery.

A cut in ECB interest rates from 2% would also widen the rate gap between the US and eurozone, and was likely to attract more investors to dollar-based assets, analysts said.

The euro’s weakness yesterday was compounded by pessimistic remarks about the eurozone by German monetary officials. They said considerable uncertainty over the pace of the eurozone recovery still existed.

And it was pointed out also that the gradual improvements in the labour market had come to a halt.

And there was no sign either of any significant strengthening of domestic demand and consumption, the German officials said.

Ulster Bank Markets economist Niall Dunne said yesterday it was possible that all of the bad news has been stitched into the euro at current exchange rate levels, including the constitution debacle.