Euro rises as Duisenberg hints at rate hike

THE EURO recovered above $1.02 yesterday after Wim Duisenberg, president of the European Central Bank, indicated that he was starting to consider the prospect of higher interest rates. The ECB's policy has previously been "neutral" since it cut interest rates to 2.5 per cent in April.

"A bias may be creeping into our considerations," he said, indicating that this bias was prompted by higher borrowing and monetary growth in the euro area. Economists said no increase was likely before next Spring.

European bond markets fell sharply in reaction to Mr Duisenberg's comments. The yield on the benchmark 10-year German government bond jumped 12 basis points to 4.78 per cent. US bond yields declined, in marked contrast, as new figures yesterday showed unchanged headline consumer prices for the second month running in June. The inflation rate fell to 2.0 per cent, after climbing to 2.3 per cent in April.

Analysts took heart, hoping that further US rate increases would be delayed. Alan Greenspan, the Fed chairman, is due to give his crucial Humphrey- Hawkins testimony to Congress next week.

Meanwhile, the British Chambers of Commerce (BCC) warned yesterday that UK companies would be forced to pull out of European markets unless sterling weakens against the euro.

The warning came as the BCC's latest economic survey showed manufacturing export sales contracted for the sixth quarter in a row. But the survey also revealed the domestic economy is on track for recovery, with manufacturers' UK sales growing at their fastest rate since the survey began in 1985.

The BCC said the export position was worst for small and medium-sized companies, who registered no improvement since its last survey.

Ian Peters, the BCC deputy director-general, said businesses wanted to see sterling fall from its current high level, equivalent to 3 German marks to the pound, to DM2.60.

"Exporters ... are now clearly looking beyond Euroland, having suffered losses in European markets," Dr Peters said. "The result may be companies withdrawing from these markets, which would not be a good thing."