The euro has continued falling, reaching new lows against the US dollar and sterling, as support for the currency was undermined by the lack of any clear statement on the currency markets from the meeting of G7 finance ministers over the weekend. The currency fell to $1.0969 from $1.1076 on Friday, a fall of nearly 8 per cent from its peak of $1.1906 set on its launch day, January 4th.
The finance ministers of the Group of Seven gave the dollar a big push by simply saying nothing to indicate they would try to halt its recent surge. Their post-summit statement simply said currencies should reflect economic fundamentals and agreed to work together to avoid excess volatility and significant misalignments of exchange rates.
The euro was also hurt by disagreement between Europe's politicians and the European Central Bank regarding interest rates.
Dr Dan McLaughlin, chief economist at ABN Amro, pointed out that the German finance minister Mr Oskar Lafontaine, wants some kind of monetary stimulus and there is little he can do to raise government spending and the ECB is not open to rate cuts. "The only way to stimulate the economy is to devalue the currency," he noted.
Mr Lafontaine did welcome the euro weakness yesterday saying it was good for Euopean exporters. And German Deputy Finance Minister, Mr Heiner Flassbeck, reiterated that he was not concerned about the euro's weakness, even as the currency fell further.
Mr Flassbeck told reporters that the decline in the euro was a normal reaction to expectations for lower interest rates in Europe and higher rates in the United States.
But in a slightly different emphasis the French central bank governor, Mr Jean Claude Trichet, said: "We must never forget that we are responsible for the confidence in the euro held by savers in Europe and in the whole world." But ECB President Mr Wim Duisenberg said that exchange rate movements are much less important than before the launch of the single currency.
He said its fall is due to evidence that the US economy is stregthening and because of political pressure to cut interest rates.
However, he said he is expecting an upturn in growth across the euro zone towards the end of the year, although it could be weak.
The danger according to Dr McLaughlin is that the market will sell the euro to a level which provokes a response from the ECB, in terms of intervention to support the currency.
"We are clearly in unknown territory and it is difficult to guess, if, or when the ECB would intervene."
Analysts are divided over what the euro's weakness means for interest rate cuts. According to Dr McLaughlin, the fall in the value of the euro pushes further interest rate cuts off the agenda. He added that a rate cut would be likely to put even more downward pressure on the currency as it could be interpreted as the ECB not placing much store in its weakening.
All eyes will now be on the US Fed chairman Mr Alan Greenspan's testimony to the US Senate Banking committee today and the House of Representatives tomorrow. If he suggest that the US economy is slowing, then the dollar could fall back.
However, most expect him to talk of the possibility of higher rates to dampen activity. That would push the dollar higher again against the euro.
