Euro reaches a five-month high as fears grow of US recession

The Euro made a leap yesterday breaking the psychological 90 cents barrier against the dollar and reaching a five-month high against the pound.

The dollar dropped to a new three-month low of 90.05 cents per euro, from 89.33 in late trading on Friday night. Meanwhile, the European single currency hit a five-month high against the pound, which fell as low as 63.22p – equivalent to 3.09 German marks. But economists said the reason for the euro revival was a growing fear of a recession in the United States rather than any enthusiasm for the currency.

"The attitude at the moment is of not wanting the dollar but not knowing what to buy," said David Bloom, global economist at HSBC. "We will have to wait before people say they would prefer to hold the euro."

The dollar started to fall across the board last Wednesday after the regional economic survey by the Federal Reserve, known as the Beige Book, showed weakness in industry had fed through to retail sales. At the same time the European Central Bank gave a strong hint it was prepared to cut interest rates later this month.

Now the financial markets are focused on key data coming out of the US, starting with retail sales today, industrial production tomorrow and inflation on Thursday.

"The perception of the US has changed fundamentally from being a miracle economy about to bounce back to something that could be more damaging – like recession," Mr Bloom said.

He said there had been similar "false dawns" for the euro in the past, but this time all indicators – corporate gloom, share prices, forward interest rates and the dollar – were all pointing in the same direction.

HSBC expects the euro to reach 95 cents by the end of the year and $1 during 2002. "Parity with the dollar will be reached once the US recession is well under way," Mr Bloom said.

The recovery in the euro's exchange rate has been underpinned by hopes that a rate cut by the European Central Bank on 30 August will boost growth. However, the eurozone is not immune from the slowing global economy, as was shown by German retail sales figures yesterday, which fell a much larger-than-expected 1.8 per cent in June.

The pound has fallen in the wake of the unexpected cut in interest rates by the Bank of England earlier this month and strong hints in its Inflation Report last week that it would cut again.

Ian Stannard, a currency strategist at BNP Paribas, said the fall was also driven by a large flow of capital out of the UK. "Until recently most of these flows went to the US but we have seen a large net outflow to Euroland, which will help boost the euro's exchange rate," he said.

HSBC's Mr Bloom said the pound was caught "half-way between economics and politics" because of the debate over UK membership of the euro.

He said that the closer the pound got to DM2.95 or 66p – commonly seen as an appropriate entry rate – the more the pound would be governed by fundamental economics.