German inflation boosts euro's recovery

THE EURO broke through another psychologically important barrier, hitting $1.07 as strong German inflation pointed to economic recovery across Europe. German consumer prices rose by 0.6 per cent in July, at the outer edge of expectations, up from a 0.4 per cent rate in June.

The rise boosted the euro to a two-month high against the dollar and it continued to advance above $1.07 for the first time since mid-May, after brushing with parity two weeks ago when it fell to a low of $1.0104. The euro's outlook began to improve last Tuesday after stronger-than-expected German business confidence supported a rally that had begun the night before.

The $1.08 level has been a focus of market attention since the Bundesbank President-designate, Ernst Welteke, said in June that the euro's rate of $1.08 in early 1998 was its appropriate reference rate rather than its January launch rate of $1.17. Yesterday Mr Welteke said he had seen signs that the European economy was gathering steam.

The dollar slid as falls in US stocks and bonds fuelled fears that overseas investors would sell dollars. The greenback fell to a five-month low against the yen, at one point hitting 115.47, its lowest since 15 February.

Sterling also gained, hitting $1.5908, its highest since 25 June. Traders said hopes of a sustained rally against the dollar hinged on Friday's preliminary second-quarter UK GDP data.