Euro boosted by signs of upturn on the Continent

FRESH SIGNS of recovery inmainland Europe helped boost the euro on the foreign exchanges yesterday.

A surge in French household purchases of clothes and appliances took total consumer spending 2.1 per cent higher last month. The figures followed other signs that the second biggest economy in Euroland is starting to emerge from its slowdown.

With evidence from Germany suggesting that it is also on the path to recovery, and fears that growth in the US will slow down, the danger of the euro falling to parity with the dollar has receded. Mark Cliffe, chief economist at ING Barings, said: "The euro will recover with the narrowing in the growth gap between the US and Euroland." He added: "Clearly a lot of people have been looking for it to fail and have rather ignored the signs of strength in Euroland."

US figures yesterday showed growth was even stronger than first estimates in the first quarter, with GDP rising at an annualised 4.3 per cent. News of the biggest increase in corporate profits in four years took Wall Street higher. But analysts now firmly expect the Federal Reserve to raise US interest rates as early as next week to slow down the roaring American economy.

At $1.0447, the euro was close to its recent high against the dollar yesterday. The currency also remained above 65p against sterling, which has weakened on new hopes of additional interest rate cuts.

The latest estimate of UK GDP showed no growth in the first quarter but the year-on-year growth rate was revised up a shade to 0.7 per cent due to an increased estimate of growth in transport services. Consumer and Government spending made the strongest contributions to growth.

Earlier in the week, Hans Tietmeyer, the Bundesbank president, helped boost the euro with upbeat comments on Germany's prospects. "The picture on the German economy is still a mixed one, but there are increasingly positive signs," he said.

The latest official statistics showed French consumers increased their spending on goods by 2.1 per cent in May, taking the year-on-year growth to 4.7 per cent. The monthly changes are volatile, but the underlying trend is pointing firmly upwards. Spending on clothing jumped 7 per cent after a 3.3 per cent fall in April. Spending on household goods rose 2.3 per cent in the month and 10.6 per cent in the year to May.

In addition, French consumer prices were unchanged in May, and 0.4 per cent lower than a year earlier. Other figures yesterday showed a 0.6 increase in hourly wages in the first quarter, taking annual pay growth to 2 per cent.

The combination of no inflation, slowly falling unemployment and rising earnings has boosted household incomes in real terms. The latest statistics from France and Germany have fuelled hopes that growth in Euroland is picking up after a dismal winter.

Eurostat, the EU statistics agency, reported a 0.7 per cent fall in EU industrial output in April, but the biggest drop was in the UK. "We are quite hopeful that in the second half of this year the industrial recovery will be coming through," said Gwyn Hacche, an economist at HSBC.