The euro consolidated its recovery on foreign exchange markets yesterday despite anticipation of a major increase in US interest rates today - a move that should boost the value of the dollar. The dollar rose against the yen, but the euro held the gains it made last week to hover around 91.5 US cents and 60.5p against sterling.
The euro's robust performance came as a German central banker warned that foreign currency intervention to support the European currency would fail without the support of the US, which was unlikely to be forthcoming. Mr Hans-Helmut Kotz, a member of the Bundesbank council, said that a failed intervention could be disastrous, pushing the euro even lower on foreign exchange markets.
"Central bank interventions can be successful when all main players are interested, but the United States is under inflationary pressure and now has no interest in a weak dollar, so one of the main players is missing," he said.
Mr Kotz, who has no influence on the decisions of the European Central Bank (ECB), urged against increasing interest rates further, simply to boost the euro, especially when inflation was not a threat.
"Why should the ECB raise interest rates and hamper growth and employment when its goal is not at risk?" he said, referring to the ECB's pledge to keep euro-zone inflation below 2 per cent.
Retail sales in Germany fell in real terms by almost 5 per cent in March compared to last year - a drop three times greater than most experts predicted. Trade in fuel fell by 47.5 per cent and retail clothes sales were down by 12.1 per cent, according to figures released by the Central Statistical Office in Wiesbaden.
The statistics take into account only about half of private consumer spending and do not include items such as spending on tourism, which accounts for a considerable part of the budget of many German households. But the sharp fall in spending on retail goods casts doubt on many analysts' predictions that German consumer spending will rise by more than 2 per cent this year.
Expectations that the US Federal Reserve will raise interest rates by half a percentage point were reinforced by data showing an increase of almost 1 per cent in US industrial output in April compared to the previous month. Economists believe that many US businesses are struggling to meet consumer demand and that the Fed will attempt to dampen the spirits of the US economy with a sharp rate rise.
US interest rates have risen five times since last June, always by a quarter of a percentage point, and they now stand at 6 per cent - 2.25 per cent higher than in the euro zone. Fears that low unemployment and high consumer spending could fuel inflation are likely to persuade the Fed to raise rates by a further half-percentage point today.
