The currency hit $1.0149 in New York, putting it less than one-and-a- half cents from parity with the dollar. The greenback also extended its gains against the pound, after the Bank of England confirmed expectations by holding interest rates at 5 per cent yesterday.
The euro, which has fallen 14 per cent since its 1 January launch, came under pressure after Jean-Claude Trichet, the French central bank governor, said the European Central Bank would only intervene in specific cases. "When it appears there is herd behaviour of great magnitude, it is a key responsibility of the authorities to see whether or not they decide to intervene, after having carefully examined the situation." Mr Trichet said that the bank should only intervene if it was "absolutely convinced" that economic fundamentals supported a move.
Romano Prodi, EU Commission President, Hans Eichel, the German Finance Minister, and Christian Noyer, the European bank's vice-president, all said the fall in the euro was because of cyclical rather than structural reasons.
Economists took this as confirming there was no support for market intervention. "It does not look as if they will be inclined to do anything this side of parity," said Mark Cliffe of ING Barings. Nick Parsons, currency strategist at Paribas Capital Markets, said intervention would simply give speculators the chance to profit from any short-lived rise. "They [ECB] do not want to be seen as having fought and lost a battle and would rather not make a battle out of it."
There was little support from figures confirming that EU GDP rose 1.8 per cent year-on-year in the first quarter. Eurobond prices tumbled on concerns about the strength of the economic recovery. Sterling hit fresh 33-month lows against the dollar after the interest rate decision. Economists expect further US rate rises but believe the UK could cut rates, undermining the pound.
Further evidence that inflation could undershoot its 2.5 per cent target came from the British Retail Consortium.
Shop prices were 0.7 per cent lower than in June 1998 - the largest annual fall since it started compiling data in November 1997. Ann Robinson, the BRC's director general, said: "Deflation is already a reality. Any rise in UK interest rates risks the inflation target being undershot."
The CBI said there was scope for more rate cuts as pay deals continued to fall. The Institute of Directors said that it did not expect any more cuts as the housing market was firming and manufacturers had turned the corner.
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