/ 25 September 2007

Euro resumes record-setting run

The euro resumed its record-setting run against the dollar on Tuesday, climbing to $1,4153 after a pair of economic reports painted a dismal picture for United States consumers and the ailing home sales market.

Though it started the day on a slow slide — dragged down by a fourth-straight month of declining German business confidence to $1,4059 — the euro climbed nearly one US cent after the New York-based Conference Board said that worries about jobs and the economy drove the US consumer confidence index for September to its lowest level in nearly two years.

That decline was augmented by a report that showed sales of existing homes fell for a sixth straight month in August, pushing sales to the lowest point since 2002 because of turmoil in credit markets.

The declines may cause the US Federal Reserve to lower its benchmark interest rate further, said David Jones, chief markets analyst at CMC Markets in London.

”It’s clearly still too soon for last week’s rate cut by the Fed to be taking any effect, but the question is now what happens at the two remaining meetings this year,” he said.

By late afternoon, the 13-nation euro was up to $1,4131 compared with $1,4087 late on Monday in New York. The British pound fell to $2,0186 from $2,0214.

The strength of the euro drew more concern, with Spain’s finance minister warning of problems and a German labour group saying the higher currency could harm the nation’s export-driven economy and curtail job growth.

It was a half-point interest rate cut to 4,75% by the US Federal Reserve last week that dragged the dollar down. That came in response to the market turbulence in the fallout from the subprime mortgage crisis, and many analysts see more US rate cuts ahead.

While the European Central Bank (ECB) and the Bank of England both kept their key rates unchanged last month, at 4% and 5,75% respectively, the German Federation of Labour Unions urged the ECB on Tuesday to follow the Fed’s lead.

The euro’s rise — it is up 6,6% since the end of 2006 — endangers ”significant parts of the German export economy and therefore growth and employment in Germany”, the group said in a statement, accusing ECB president Jean-Claude Trichet of feeding ”irrational fears of inflation”.

Lower interest rates, used to jump-start an economy, can weaken a currency as investors transfer funds to countries with higher interest rates, where they get better returns. A higher euro also makes vacations in Europe more expensive for US travellers and can make European companies choose between raising prices or cutting profitability on goods sold in the US.

”The increase in the euro value through the $1,40 wall and maybe even past $1,42 means German industry exports will be less competitive, not just in the US, but in all nations that use the dollar,” said Juergen Thumann, president of the Federation of German Industry.

Spanish Finance Minister Pedro Solbes said the rapid rise of the euro means that companies that use it must be prepared.

”Euro strength can bring problems, but if companies have time to prepare for them, they can compensate,” he told reporters in Madrid.

The dollar slipped to 114,54 yen from 114,88 yen after Yasuo Fukuda, a quiet compromiser who has promised to bring stability and moderation to Japan’s tumultuous political scene, was elected prime minister. — Sapa-AP