Euro seen not going anywhere very fast

By Andrew McCathie

BERLIN (DPA): Nobody thought it would be easy. But any optimism that the euro might manage a dramatic recovery on the back of a stronger European economy and the prospects of higher interest rates in Europe appear to be fading.

After pushing past the key US$0.96 in June as data showed the United States economy starting to cool off, the euro has edged back down again in recent weeks with the European Central Bank (ECB) setting a reference rate on Thursday of $0.9389.

Even last month's passage through parliament of Germany's landmark tax reform plan failed to give the euro a firm direction. The common currency has lost about 19 percent of its value against the dollar since its launch in January last year.

Moreover, economic analysts see little change in the common currency's trading pattern in the coming months and are forecasting that the euro will tend to trade sideways before slowly crawling back to parity with the greenback by the end of the year.

This is likely to coincide with further signs that the gap between U.S. and European interest rates and economic growth rates is narrowing.

Even then, Germany's influential Ifo economic research institute said on Thursday that it saw the euro rising by between five and ten percent by the end of next year.

The euro's recent lackluster performance is despite a steady stream of upbeat reports on the state of the 11-member eurozone economy and a round of hawkish statements by ECB members about renewed inflationary pressures in the economy built around the common currency.

More recently, however, the euro's fortunes have been hit by speculation that the currency will suffer because of the number of European companies buying into the United States.

In a sense this was borne out by official data released on Thursday, which showed European businesses investing 161 billion euros ($150 billion) in the U.S. last year.

This represented a rise of 20 percent and compares with a 15 percent increase in U.S. business investment in Europe during the same period.

The release of the figures on corporate Europe's foreign investment also coincided with the publication on Thursday of an optimistic outlook for Europe drawn up by the Munich-based Ifo institute.

In its latest report, Ifo lifted its 2000 growth forecasts for the eurozone from 2.9 percent to 3.4 percent and in effect to its fastest expansion rate in ten years.

Powered by fast-paced export growth and a strong upswing in the eurozone's powerhouse economy, Germany, Europe's biggest bank, the Frankfurt-based Deutsche Bank AG this month also raised its forecasts for the eurozone, predicting a growth rate of 3.6 per this year and next.

What is more, both Ifo and Deutsche Bank have predicted further rises in European rates as the year progresses with economists expecting the ECB to deliver another monetary tightening possibly in September and possibly by the end of August.

The ECB is to meet next Thursday but few economists are expecting a rate hike to emerge.

"The chances of a move next week appear low, because the latest large move still is recent and (ECB chief) Wim Duisenberg suggested that this meeting would not thoroughly discuss monetary policy," said Jose Alzola, economist with Schroder Salomon Smith Barney.

The ECB last lifted its benchmark rate from 3.75 percent to 4.25 percent in June. This brought to five the number of rate hikes since the bank launched its tightening cycle last November.

But the quickening economic growth combined with euro weakness and firm oil prices has however begun to fuel inflationary pressures across the eurozone with economists now expecting eurozone inflation to top the ECB's 2 percent forecast.

Reflecting a new round of concern within the European central bank about the build-up in inflationary pressures both Bank of France Governor Jean-Claude Trichet and his counterpart at Germany's Bundesbank, Ernst Welteke expressed worries about price stability.

This, analysts said, indicated that the ECB remained on course to a monetary tightening and another 50 basis points rise in the bank's key refinancing rate by the end of the year.