Andrew Alexander of the Daily Mail on why the Euro's Tower of Babel is leaving currency markets confused


Fortunately for the euro, there was a bit of a flap on Wall Street yesterday. The National Association of Purchasers and Managers Index for May came out at an unexpectedly strong 55.2, against 52.8 in April. It suggested faster growth than ever in the US economy, pointing to a possible interest rate rise. The Dow quickly tumbled 150 points, though recovering much of that later.

With a weaker dollar, the euro trickled up to $1.0452 compared with Monday's close of $1.0436, but it touched another new low against the pound of of 64.81p.

Foreign exchange dealers were marking time, awaiting more US statistics, praying for the Kosovo war to end and waiting to see what ministers will say at the EU summit on Friday.

The single currency is in an interesting new phase.

Phase One, after the January launch, as the decline set in, might be called the Jim Callaghan period, as officialdom asked: 'Crisis! What crisis?' The European Central Bank and various governments saw no real problem. What went down could always go up. Just wait, they said, until the world central banks started filling their coffers with euros.

Anyway, added some politicians and businessmen, a low exchange rate would help euro-zone exports. They blamed the dollar's strength, ignoring the fact that the single currency had weakened so much against, for example, the pound and the Swiss franc.

This affectation of indifference became harder to sustain as the weeks passed. When the ECB cut interest rates in April from 3pc to

2.5pc, it was thought that would boost the euro-zone economy.

But it failed to do so and the euro continued to sink.

Phase Two, starting a week or so ago, was the Corporal Jones period, with bankers and politicians rushing around crying: 'Don't panic.'

They insisted that they did take the euro's fall seriously. Retiring Bundesbank president Hans Tiet-meyer said he would worry if it fell further. His successor, Ernest Welteke, said the fall 'had to stop'.

This seemed a hint that intervention in the markets was being considered. To add to worries, there was the euro-zone governments' decision to allow Italy to raise its budget deficit above previously agreed levels. But no other government would be dodging the column, finance ministers insisted.

We shall see, murmured foreign exchange dealers, eyeing the out-look for Germany.

We are now in Phase Three - the Tower of Babel period. The Portuguese and Belgian foreign ministers said intervention would not help. ECB chief economist Otmar Issing said much the same thing, adding that economic reform was the key.

But ECB Council member Yves Mersch implied strongly that the bank would consider intervention, though the key moment had not been reached yet. Bundesbank council member Ernst Meister said that further weaknesses in the euro might push up interest rates.

Meanwhile, French Prime Minister Lionel Jospin insisted it would be wrong anyway to judge the euro 'on three months' - two months seem to have gone missing. And acting Brussels Commission President Jacques Santer declared confidently that the euro was 'continuing to prove itself''.

A fall in the ECB's reserves last month set some analysts wondering if there had already been intervention. The ECB implied not.

The problem about supporting the euro in the market, dealers pointed out, was that it would be unlikely to make a substantial or lasting impact unless others took part in the operation, including Britain, the US and Japan.

Britain might be eager to help.

The Japanese position is unclear. The US authorities, long dubious about currency intervention on principle, have their own priori-ties, given the effect a falling dollar might have on Wall Street.

Things might have to look considerably worse before such all-round agreement was reached on the need for a rescue.

If the US Fed does tighten interest rates, it could go either way for the euro. The attractions of even higher American interest rates compared with those in the euro-zone might draw funds into the dollar. But, if higher rates slow down US growth, that might mean Wall Street attracted fewer investors.

Against the background of the new European currency with such a poor record of stability, the foreign exchange markets have become harder to predict.

But certain fundamentals are plain. The US economy is strong and the major European economies - Germany and Italy in particular - remain weak. That maintains downward pressure on the euro as does the continuing Kosovo war.

Phase Four promises to be interesting.


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