Euro at new dollar high as ECB holds rates
By: Administrative Account | Source: Financial Times
December 4, 2003 3:40PM EST

By Jennifer Hughes

Published: December 4 2003 12:46 | Last Updated: December 4 2003 14:22

The euro hit another new lifetime high against the US dollar on Thursday, after the European Central Bank left interest rates on hold, apparently shrugging aside rising concerns about the impact of the currency's strength on the eurozone's recovery prospects. The ECB's decision was widely expected by the markets, despite the euro's rise, after senior European bankers this week suggested a change in policy was very unlikely. Following the decision, the euro hit its fourth lifetime high in as many days at $1.2150 against the dollar. Many economists and strategists predict significant further appreciation. The single currency has gained 13 per cent against the dollar this year, and is up more than 27 per cent from when it began rallying in April 2002. Jean-Claude Trichet, ECB president who took over from Wim Duisenberg last month, avoided commenting on the exchange rate in remarks to the media. The bank's main refinancing rate was left at its current post-war low of 2 per cent. This year the bank lowered borrowing costs by a quarter-point in March, then by a further half percentage point in June. Mr Trichet said inflation had not fallen as quickly as the bank had expected and would continue to hover around 2 per cent in the months ahead. He said that current interest rates were "appropriate." "With growth likely to remain below potential for some time, and inflation set to move lower early in 2004, the ECB is unlikely to be in a rush to tighten," said Daragh Maher, strategist at ING Financial Markets. Economists said investors' focus would now turn to the bank's monthly bulletin which is due out next Thursday. Economists fear that if currency strength hurts exports and domestic consumer activity does not pick up, the eurozone's recovery could be stifled. Figures released this week showed that the eurozone's return to growth in the third quarter was almost entirely due to stronger exports. Companies have already warned their export competitiveness is under threat from the euro's appreciation. "There's a tight relationship between the euro and production growth - this signals to us that there's still a lagging impact of euro appreciation to come on eurozone output," said Steven Saywell, strategist at Citibank. Data this week from France and Germany, the eurozone's two largest economies, underlined the precariousness of eurozone consumer activity. Retailers in Germany warned Christmas sales were unlikely to improve much on the low levels seen last year while French consumer confidence fell to its lowest level since the war in Iraq. Other major central banks, notably the UK's and Australia's, have already started tightening monetary policy once more. Earlier on Thursday, the Bank of England announced it would hold rates steady at 3.75 per cent after raising borrowing costs last month by a quarter point. But the Federal Reserve has indicated US rates will remain on hold for some time to come, prompting suggestions the ECB could yet ease policy further to boost the still weak eurozone economy.

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