The euro has hit fresh lows against the dollar as concern about Europe's poor growth prospects combined with the Kosovo crisis to drive it lower against the US currrency.
The EU single currency dipped below $1.0750 in New York trading last night after the European Commission signalled that it would cut its 1999 euro zone growth forecast to near 2 per cent, paving the way for the European Central Bank (ECB) to justify another interest rate cut if it wants.
The European Monetary Affairs Commissioner, Mr Yves-Thibault de Silguy, said that the headline growth forecast would be cut to "a little bit higher than 2 per cent" from a 2.6 per cent estimate made last October.
"America is booming, Europe isn't and now there is a war there as well, so there is no reason to buy euros," one US-based trader noted.
The dollar was also supported by speculation ahead of next week's US Federal Reserves Open Market Committee meeting, which some feel may signal higher US interest rates to come, while in Europe, many economists are looking for a cut in interest rates.
Speaking in Dublin yesterday, Dr Norbert Walter, chief economist at Deutsche Bank, said it was impossible to predict whether the ECB would meet the expectations of some in the market and ease monetary policy at its next meeting on April 8th.
In Dublin to address the German-Irish Chamber of Commerce yesterday, Dr Walter said that even if the ECB fails to move in early April, a cut remains on the cards at some point in the second quarter.
If first quarter growth figures for the euro zone show evidence of recession and are accompanied by stagnation of prices or modest deflation, the ECB could cut rates by a quarter of a percentage point, he said. The bank could even cut by as much as half a percentage point if the euro strengthens in the meantime, he says.
However, Dr Walter said that the risks are considerable that the euro will not strengthen but neither did he believe the currency is on a permanent downward slide.
He pointed out that the ECB has reserves of some $200 billion which it may already have used to support the nascent single European currency and which it could use again as ammunition if needed.
He believed the ECB is most comfortable with the euro in a range of $1.10 to $1.20 and will consider intervention outside of that range, taking any move toward parity with the dollar very seriously.
Meanwhile, Dr Walter was not overly optimistic about the outlook for the European economy, saying it could surprise on the downside rather than the upside with growth possibly falling below 2 per cent.
The recession in Asia and Latin America will continue to impact on growth in Europe and has not been properly taken into consideration by European business, he said. And although the behaviour of the European consumer has been better-than-expected, Dr Walter expects consumer sentiment to decline at some point, possibly in the second quarter.
Dr Walter said the current crisis in Yugoslavia could drag on and prove more pervasive than expected, with negative consequences for the European economy. A drawn-out conflict in the Balkan region could lead to a deterioration in the European investment climate, calling Europe's safe haven status into question, he said.
