LONDON, 19 April 2007 — The euro surged past 1.36 dollars for the first time since December 2004 yesterday while sterling hit a near 26-year high against the against the dollar on fears for US economic prospects.
The weakened dollar “reflects a combination both of concerns about the US economy ... and at the same time the contrasting strength of the European economy which is growing much more rapidly,” Capital Economics analyst Jonathan Loynes said in London.
“Those concerns have been reflected in expectations for interest rates,” he added.
Owing to strengthening European economies, particularly in Germany, the market is forecasting higher interest rates for the euro zone and Britain in the coming months. The euro reached as high as 1.3616 dollars in early European trading before falling back to 1.3576 against 1.3564 late Tuesday in New York.
The pound sterling struck 2.0133 dollars to reach its highest reading since June 1981. It later traded at 2.0040 against 2.0063 on Tuesday. “Pound strength continues to build following yesterday’s (Tuesday’s) historic move above 2.00 dollars on the back of the stronger than expected” British inflation data, ABN Amro analyst Peter Frank said. The inflation data increased expectations that British interest rates will soon be increased to contain activity and price rises.
Meanwhile the euro zone, and particularly the German economy, is showing unexpectedly strong growth despite the strength of the euro, which can increase the price of exports on foreign markets and dampen overall economic activity.
The dollar has been hit also by softer-than-expected US core inflation data for March, published on Tuesday, which prompted renewed speculation that the US Federal Reserve may lower interest rates later this year, dealers said.
In the United States and Britain, the key rates stand at 5.25 percent. The main interest rate is at 3.75 percent in the euro zone and 0.50 percent in Japan.
Analysts expect the Bank of England to increase British interest rates by a quarter-point to 5.50 percent in May and further still before the end of 2007 after official data published Tuesday showed British annual inflation had surged to a decade-high above 3.0 percent in March.
Sterling’s all-time high against the dollar is 2.4546 dollars, reached in 1980.
The euro was changing hands at 1.3576 dollars, against 1.3564 dollars late on Tuesday, 160.56 yen (161.29), 0.6773 pounds (0.6760) and 1.6363 Swiss francs (1.6402). The dollar stood at 118.28 yen (118.90) and 1.1971 Swiss francs (1.2086). The pound was being traded at 2.0040 dollars (2.0063).
On the London Bullion Market, the price of gold edged up to $688.75 per ounce from $688.00 late on Tuesday.
