Europe piles pressure on US as the greenback dips to new low

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The Dollar hit fresh lows against the euro and the pound yesterday after European finance ministers launched a direct challenge to the US to tackle its financial deficits.

The Belgian and Austrian finance ministers said that Monday night's statement by the euro group of ministers and the European Central Bank was aimed at the White House.

In the unusually bluntly worded communiqué, they hinted they were prepared to intervene in the currency markets to stem the rise in the single currency.

They said: "Excessive volatility and disorderly movements in exchange rates are undesirable for economic growth. In particular, recent sharp moves of exchange rates are unwelcome and not conducive to orderly adjustments of external imbalances. All major countries and economic areas must play their part more actively in reducing global imbalances by putting in place the appropriate economic policies. We will monitor the situation closely."

But in a sign that traders were prepared to call the bluff of both ministers and the ECB, they pushed the dollar to a fresh all-time trough of $1.3469 against the euro and through $1.95 against sterling to notch up another 12-year low.

Didier Reynders, the Belgian minister, removed any doubt about the target of the statement. He said: "The message is intended for our American friends. There are imbalances on the US side and it is up to the US to do something about it."

Karl-Heinz Grasser, of Austria, added: "The US will have to act because it is these two major imbalances that they themselves have to tackle."

On Monday Herve Gaymard, the French finance minister, said the slide in the dollar against the euro "should not continue".

Analysts believe the dollar has fallen over fears the US budget and current accounts are unsustainable without a fall in the dollar. But there was no comment from the US Treasury, confirming traders' views that the Europeans will not get support from Washington for intervention. Adam Cole, a senior currency strategist at RBC Capital Markets, said: "The threat of intervention somewhat lacks credibility. This is about dollar weakness, not euro strength, so the crucial missing ingredient is the US Federal Reserve and the market perception is that the US authorities are happy to see the dollar go down."

Analysts at ING Financial Markets said that the less effect European rhetoric had on the exchange rate, the more likely the ECB would be forced to act - either through intervention or cuts in interest rates.

Meanwhile sterling rose as high as $1.9508, its highest since Britain's currency crisis of September 1992 when the pound was forced out of the European exchange rate mechanism. Lord Lamont, who was the chancellor during the ERM crisis, said yesterday that the pound would probably break through the two-dollar barrier.