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Bundesbank steps in to boost ailing euro

EUROPEAN CENTRAL banks have stepped in for the first time to support the euro on the foreign exchanges. The Bundesbank intervened in the market yesterday as the new currency hovered near record lows, according to traders.

The intervention to try and support the euro came as officials signalled that the European Central Bank would resist political pressure to cut interest rates this week. Analysts believe the weakness of the exchange rate is one of the main factors holding back the ECB.

The euro, which has depreciated against the world's major currencies since its launch, closed at a record low against sterling of 67.6p. It has lost 5 per cent against the pound this year. But it pulled back from Monday's low against the dollar following the widespread rumours of market intervention. The European currency was trading at $1.095, up from Monday's low of $1.085.

Traders at several leading banks said the Bundesbank had been selling both sterling and the dollar in exchange for the new European currency.

"The Bundesbank has apparently been involved in the market today and it seems that other national central banks have been in and out of the market over the last few days," said one trader.

At another bank, the director of currency research, said: "Our traders say that Buba [the Bundesbank] has been intervening in both dollar/euro and sterling/euro."

The weakness of the euro is expected to prevent the ECB from taking any action on rates this week. Ernst Welteke, a prominent Bundesbank council member, said yesterday: "There is a big questionmark about whether a further reduction in rates would boost growth."

Ottmar Issing, chief economist of the ECB, and Christian Noyer, a French member of its council, made similar remarks earlier this week.

The refusal to budge on interest rates has pitted the central bank against politicians - notably Oskar Lafontaine, Germany's finance minister - calling on the ECB to boost demand. As this makes the central bank less likely to act, observers see the manoeuvres as a means of making sure the bankers get the blame for potential economic problems.

"Less than three months into the euro we are seeing some political tensions," said Graham Bishop of Salomon Brothers. He added that with a weak currency, strong monetary growth and uncomfortably high wage settlements in Germany, there was not a clear economic case for an interest rate reduction.

However, figures yesterday showed inflation in the 11 euro countries was stable at just 0.8 per cent in January. The level of prices fell 0.1 per cent during the month.

Some dealers said it was unclear whether the Bundesbank was actively trying to support the euro yesterday or simply engaging in run-of-the- mill commercial activities. One said: "It may have been a genuine order from Buba. If it was intervention, it was on a pretty small scale."

Analysts said rumours of central bank attempts to prop up the ailing European currency would become more common if the euro's weakness persisted.

One analyst said: "We've had a sharp depreciation in the exchange rate and it's only natural the market is a bit jittery."

The Bundesbank refused to confirm or deny the reports. A spokesman said: "We do not comment on rumours as a matter of principle."