Euro holds steady under threat of assault

THE EURO gained a brief reprieve in the financial markets yesterday thanks to a concerted effort by European bankers and politicians to talk up the beleaguered currency.

But analysts predicted it would come under renewed pressure once a key meeting of the European Central Bank today and this week's European summit were out of the way.

"We are approaching a crunch. There is a clear danger the markets will mount a serious assault on the euro," said Mark Cliffe, chief economist at ING Barings.

Many currency experts reckon the euro could dive below parity against the US dollar. It held steady at just above $1.04 yesterday.

The reason for the euro's prolonged weakness was highlighted by new figures showing sluggish growth in European industry in contrast to booming US manufacturing.

The purchasing managers' index of activity declined in the Euro-11 countries, from 50.7 to 50.4 in May, just above the dividing line between recession and expansion. Although French manufacturing rebounded strongly, activity in Germany and Italy continued to slow.

In stark contrast, the same survey for the US revealed a bounce from an already healthy 52.2 in April to 55.2, suggesting there has been no slowdown in the pace of growth in the economy. However, the survey showed the first increase in prices charged by manufacturers since December 1997.

The news hit bond and share prices in the US yesterday because of fears that the Federal Reserve will raise interest rates to slow the economy to a sustainable pace. Analysts will comb labour market figures due on Friday for signs of inflationary pressure from earnings.

The dip on Wall Street, where the Dow Jones index was 117 points lower at 10,442.7 late morning, sent the dollar lower in a knee-jerk reaction yesterday. But the prospect of higher US interest rates at a time when the European Central Bank cannot risk raising its interest rates will keep the euro under pressure.

Edgar Meister, a member of the Bundesbank Council, said yesterday that the weak euro might force the ECB to defend the currency with a rate increase.

But few analysts think the central bank could risk the damage this would inflict on the weak core economies of Europe.