Euro reaches fresh high against dollar

The European Central Bank, like the Bank of England, kept interest rates on hold yesterday. However, hawkish remarks by the ECB president Jean-Claude Trichet pushed the euro to fresh highs against the US dollar.

At his post-decision press conference, Mr Trichet said there was "strong upward pressure on inflation", and confirmed that "the current monetary policy stance will contribute" to curbing inflation. The ECB left rates at 4 per cent, where they have stood since June 2007. The 21-member rate-setting council was unanimous in leaving interest rates unchanged, Mr Trichet added. The markets anticipate no moves downwards for many months.

Mr Trichet and his colleagues are faced with an even more difficult policy challenge than the Bank of England – with higher inflation and lower growth than in the UK. Growth has been stifled by the fast appreciating euro – up 17 per cent versus the dollar over the past year. However, and despite the currency's strength, higher commodity and food prices have pushed eurozone inflation to a 14-year high of 3.2 per cent.

The general assumption over the past few months has been that the US Federal Reserve will continue to cut rates faster than the ECB. The current market reckoning is that there is a better than evens chance the Fed will lower its target funds rate by 0.75 percentage point to 2.25 per cent at its next meeting on 18 March.

The ECB is also expected to be more cautious than the Bank of England, which has seen the European currency hit new highs against sterling. A euro is now worth 76.5 pence.

The euro's switcharound has been dramatic. When it was introduced in 1999, it was dismissed in some forex circles quarters as a "toilet currency". Now some believe it will replace the dollar as the world's reserve currency.