Hint of Japanese rate rise hits euro

The under-fire euro tumbled to a 10-week low against the dollar and extended losses against a range of other currencies yesterday amid new data suggesting that euroland is still struggling to catch up with the American economy.

The single currency fell to a trough of 89.90 cents, its lowest level since late May, before staging a quick rebound. It also suffered loses against both the pound and the yen.

"The euro seems to be under duress," said John Hazelton, trader at PNC Bank in Pittsburgh.

"Rightly or wrongly, people are still bringing money into the US and it's at the expense of the euro."

The euro came under pressure against the yen overnight amid fresh speculation that Japan may raise interest rates for the first time in a decade, possibly as soon as Friday.

Its weakness was then compounded by figures showing a smaller-than-expected 9,000 fall in German unemployment in July to a total of 3.891m and a strong surge in US productivity.

The US labour department reported that non-farm US productivity rose 5.3% while unit labour costs fell 0.1% in the second quarter.

Analysts said the data suggested euroland's jobs market was still suffering from structural rigidities while fears of a sharp surge of inflation in the US were misplaced.

The prospect of a Japanese rate rise at Friday's meeting of the Bank of Japan was floated by the governor Masaru Hayami, who said: "I would like to seize the earliest opportunity possible to end the zero-rate policy."

His comments brought a wave of criticism from government ministers who fear a premature interest rate rise could damage the fragile economic recovery.

The Bank postponed a move last month after the collapse of the Sogo department store group triggered fears of a renewed wave of bankruptcies.