Euro sinks below dollar parity as dealers predict further slide

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The Independent Online

The Euro dived to a new all-time low in hectic trading yesterday, falling decisively below parity with the US dollar for the first time.

The Euro dived to a new all-time low in hectic trading yesterday, falling decisively below parity with the US dollar for the first time.

Figures showing a surge in orders placed with US factories, confirming the vigour of the American economy, sent the euro from just above $1 to as low as $0.9877. This was its first drop below 99 cents. Traders said technical factors such as the expiry of big currency option trades also contributed to the drama. Analysts predicted the European currency could fall yet further in the short term, to perhaps 97 cents.

Stephen Lewis, chief economist at Monument Derivatives, said: "It should not go much lower on the fundamentals. The problem is that investment flows are running very heavily against the euro."

Many suggested there was no chance of the euro recovering as long as the American economy performs so well, while others expressed doubts about Euroland's prospects. Nick Stamenkovic, a senior analyst at IDEAglobal.com, said: "There is a general aversion to holding euros because the pace of structural economic reform in Europe is too slow."

All except one of 112 economists questioned in a new survey expect the euro to be higher by the end of the year thanks to the economic recovery on the Continent. The average forecast collected by Consensus Economics predicts that the exchange rate will recover to $1.1260 by January 2001. However, there is no sign of the currency turning around in the near future.

Sterling remained near its recent high against the single currency yesterday, as political controversy about potential UK membership continued to rage. Its index against a range of currencies edged higher.

Mark Cliffe, the chief economist at ING Barings, said the pound's strength was driven by flows into and out of euros and dollars. "We are the flea on the back of a very large elephant."

Tony Blair will use a speech to the World Economic Forum in Davos today to emphasise the importance of reform in Europe, saying a lack of flexibility has prevented the EU from enjoying, like the US, the fruits of new technology.

However, a new report yesterday said the European Commission's "old-fashioned" tax-harmonisation agenda is being overtaken by events as EU countries continue to cut corporate tax rates. Ian Barlow, the head of KPMG's European tax practice, said: "The reality is that most countries are determined to stay competitive on their overall tax rates." There was a steady long-term trend towards lower corporate-tax rates across the OECD, he said, posing a real challenge to tax-harmonisation plans.

Ireland has the lowest corporate-tax rate, due to drop to 12.5 per cent by 2003. The UK's rate of 30 per cent is one of the lowest. But the French corporate-tax rate fell from 40 to 36.66 per cent last year. Germany has also cut its rate slightly to 51.63 per cent and plans a reduction to below 40 per cent in the forthcoming corporate-tax reform.

It was announced yesterday that a senior British civil servant is to to become the new head of the OECD's fiscal affairs committee, which is likely to become a key forum for future discussions on controversial EU tax-harmonisation proposals. EU ministers agreed at the Helsinki Summit last month to look at widespread international exchange of information on interest earnings as an alternative to the direct withholding of tax due, which would threaten the City's Eurobond market.

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