Euro rebound expected to be short-lived

THE euro, which hit new four-year lows on Wednesday, rebounded yesterday as speculators were forced to sell the currency on the back of strong gains.

The currency fell to a low of $1.2144 on May 19, and has gained 1.4% against the dollar this week, its biggest gain since the five days ending 11 September 2009.

Some economists expect the gain will be short- lived and that the scramble in Europe to protect the weaker economies will slow economic recovery, leading to further euro weakness.

Arnab Das, managing director of Roubini Global Economics, said the euro was under pressure due to over-borrowing in some states and the push to get countries to agree stringent fiscal reform was “federalism by stealth”.

The current moves to cut state spending and lower wages will lead to weak euro growth and add to pressure on the euro, he told Bloomberg television.

The cracks are appearing in Europe, with German Chancellor Angela Merkel warning on Thursday ahead of a parliamentary vote on the rescue package that the euro was “in danger”.

But French Minister Christine Legarde countered: “I absolutely do not agree the euro is in danger.”

Political analysts said yesterday that Dr Merkel took the strong line on the euro to ensure that the EU rescue package got voted through by Germany’s parliament yesterday.

This weekend’s meeting of European finance ministers may set the tone for the currency’s performance in the week ahead.