ECB considers rate cut as dollar continues to slide

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The Independent Online

The European Central Bank is thought to be considering cutting interest rates as the dollar took another beating on foreign exchanges yesterday.

The pound and euro rose against the dollar, although foreign exchange trade was thin because many dealers have taken the new year week off.

Nevertheless, sterling hit $1.7770, its highest dollar rate since it left the European exchange rate mechanism in October 1992. It later retreated to $1.7758. The euro touched an all-time high of $1.2511 before slipping below $1.25.

The pound has risen by more than 10 per cent against the dollar this year. The euro began life in January 1999 at $1.20, but quickly fell to below $1.00.

"When you get a big trend like this, it can be hard to turn it around," said Marc Chandler, the chief currency strategist at HSBC USA in New York. "It seems the pain threshold has not yet been reached. I wouldn't look for a recovery this week or next."

A variety of reasons has been offered for the dollar's continued weakness, from the BSE crisis in Washington State to the improvement in Japan's chronically sick banking sector, which is said to have prompted selling of dollars to buy yen. The Japanese Ministry of Finance said last week that it would sell as much as 10 trillion yen of US Treasury bonds to raise funds to sell in the foreign exchange market.

And while forthcoming US economic data may reassure borrowers that the US Federal Reserve will not have to raise interest rates, they are expected to paint a picture of gloom for the US economy. The US Conference Board's index of consumer confidence, to be published today, is expected to show a decline from 91.7 to to 91.4. On Friday the Institute for Supply Management's manufacturing index could drop from 62.8 to 61.0.

The euro may advance to $1.35 by mid-year, according to Nicole Elliott, a currency strategist at Mizuho Corporate Bank in London. That "will really start to hurt, at levels where central bankers will worry what to do now," she told Bloomberg in an interview. But the Bank of England is not expected to take action unless the pound goes over $2, speculators believe.

Gold has been benefited from the dollar's slump because its price is quoted in dollars. It rose by $1.10 to $413.90 an ounce and New York gold futures rose to a seven-year high.

The gain in gold is "purely speculative, based on the weakness of the dollar," said Raymond Nessim, the head of MKS Finance in New York. "Because of the huge US budget deficit, there is no sign or indication that the dollar will stabilise or strengthen at this stage."