Euro sinks to new low

The impotence of Europe's policymakers to prop up the ailing single currency was demonstrated yesterday when the euro plunged to new record lows against the dollar within hours of the European Central Bank's decision to raise interest rates.

The rate rise was seen by analysts as an attempt to bolster the ailing currency but as ECB policymakers repeated their view that the euro will strengthen as European growth picks up, the single currency shed more than a cent against the dollar, taking it below 91 cents for the first time.

"It's a euro weakness story yet again," said Audrey Childe-Freeman, European economist at CIBC World Markets. "The market was trading more cautiously before the ECB just in case we got a surprise move and once a 25 basis point rate hike was out of the way people just carried on selling euros."

In a statement explaining its decision to raise interest rates to 3.75%, the European Central Bank said it was concerned strong credit growth and the weakening currency might push up inflation. Bundesbank president Ernst Welteke said the rise had been necessary to avoid the need for a heftier rate rise later.

"I see a higher rate of growth in the eurozone than in the US and when that happens the euro's external value will rise," he said. "That is the reason why it is always possible to talk about the euro's potential."

However, on the foreign exchange markets yesterday, the euro's potential seemed to be entirely downward. It closed in London at 57.86 cents against the pound, its lowest ever level, equivalent to around 3.37 German marks, a 14-year high.

After tumbling to a record 90.89 cents against the dollar, it closed at 91.15 cents in London, more than a cent lower than its previous close.

Analysts said the European Central Bank had had little choice but to increase rates. If they had done nothing, the market would have interpreted it as a signal the bank was not concerned about the euro and would have dumped the currency.

"The expectations in the market were so pronounced that they didn't have much choice," said Eckhard Schulte of Industrial Bank of Japan.

However, the 0.25% rise was not enough to restore faith in the bank's support for the euro.

"This kind of hike is not going to stop the rut on the euro," said David Brown, chief economist at Bear Stearns in London. "They should have gone for half point hike."

But other analysts said a larger rate rise would have smacked of panic.

The euro has floundered in recent days at historic lows but analysts say there is little the central bank can do to restore faith in the euro as US economic growth roars past Europe's budding revival.

Mr Schulte said the bank had made a mistake by saying in its statement that the single currency's exchange rate did not reflect economic fundamentals.

"I don't think the ECB should generate this expectation of a rising currency soon, because they cannot manage it," he said. "The ECB has generated the expectation of a rising euro for many months and it didn't happen. And that of course means that to some extent the central bank is losing credibility."