ECB puts markets on alert with euro purchase plan

The European Central Bank caught currency traders on the hop by announcing yesterday it would use the interest earned on its foreign exchange reserves to buy euros.

The European Central Bank caught currency traders on the hop by announcing yesterday it would use the interest earned on its foreign exchange reserves to buy euros.

It insisted the move, worth 2.5bn euros (£1.53bn) in sales of mainly US dollar assets, did not amount to intervention to support the embarrassingly weak currency. But the announcement successfully put the markets on alert for future action.

It also won the ECB some rare praise, as the sale will cash in on the 27 per cent appreciation of its dollar reserves since 1 January 1999. "The price that we are making is not unattractive," admitted Wim Duisenberg, the ECB's president.

Alison Cottrell, chief economist at Paine Webber, said the decision did amount to intervention on a small scale.

"It walks like a duck and quacks like a duck," she said. She added: "It doesn't change the big picture of capital flowing into dollars but it shows the ECB still has a pulse."

The euro responded with an initial jump against the dollar yesterday, although later falling to $0.8610 in choppy trading.

Although analysts do not expect co-ordinated intervention to result from the G7 finance ministers' meeting in Prague at the end of next week, the mere fact of the meeting will keep them cautious in the meanwhile. Lorenzo Codogno at Bank of America said: "I don't really think they have the intention to intervene massively, but if they start doing even small amounts on a consistent basis it could help sentiment towards the euro."

The ECB announcement came just ahead of a decision to leave its key interest rate unchanged at 4.5 per cent. However, further rate increases are expected as growth and inflation pick up in the eurozone.

Mr Duisenberg said: "The fact that the euro has continued to depreciate over recent months is not in line with the strong economic fundamentals."

He said the currency markets were overshooting. "At some point there will come a reversal and it is that point that I'm so anxiously awaiting." But he said the ECB would reveal any foreign exchange market intervention after the fact, not before.