Euro benefits from weakness in US economy

The euro nosed above 90 cents against the dollar yesterday for the first time in three months, amid growing concerns about the health of the US economy.

The dollar has been under serious pressure since the Federal Reserve hinted last week that weakness in US manufacturing was spreading to the consumer sector, and economists say that it is likely to slide still further. Yesterday also saw the dollar fall to a periodic low against the Swiss franc and weaken against the yen.

Predicting a short-term euro high of 91 or 92 cents, Mr Austin Hughes of Irish Intercontinental Bank said that the euro's rise should be characterised as "a flight out of the dollar rather than a flight into the euro" and could not be taken as a sign of confidence in the European currency.

"It reflects growing concerns about the US outlook," said Mr Hughes, who believes that a US turnaround is becoming more remote as times goes on. More worrying, according to Mr Hughes, is the apparent attempt of the Federal Reserve to subtly engineer a weaker dollar.

This would be a response to strident calls from the US manufacturing sector which has been hard hit by export difficulties caused by a strong currency.

A weakened dollar and consequent strong euro would be seen as a negative factor in an already slowing European economy. "A substantial rise in the euro would be a real problem for exporters," said Mr Hughes. "Most economies see a strong currency as a liability."

This becomes more significant for Europe with the prospect of a fast-weakening eurozone economy, according to Mr Hughes.

"The weakness of the European economy is not appreciated as yet," he said.

Mr Aziz McMahon of Ulster Bank was forecasting a euro high of 93 cents, yesterday, agreeing that the markets had accepted that an economic rebound in the US was now a longer-term prospect than before.

The euro closed at 89.8 cents against the dollar last night.